Author: Carter LeCraw, American Values Investments
Covestor model: American Heroes
Disclosure: None
There is a familiar saying in the investment world, based on an interpretation of historical returns data: “Sell in May and go away”. Well, it looks like that was good advice for this May, but the last few days of June did bring the American Heroes portfolio back into positive ground for the second quarter. The S&P 500 was down 0.39% for this period.
The rest of the aforementioned strategy suggests buying stocks near the end of the calendar year or at the very beginning of a new year. It’s basically another market timing strategy, with the potential to get expensive due to taxes and transaction costs. There is also little empirical evidence to support the strategy. The philosophy at American Values Investments is to use asset allocation to determine the appropriate amount of equities based on a comprehensive risk profile and then invest in American Hero Companies.
Economics involves observations and interpretations of financial data. A couple of observations from the second quarter are that price to earnings ratios are near the historical average and profit margins are near historical peaks. The corresponding interpretations are that stock prices are reasonably priced and that revenues need to grow in order to grow profits. Profits need to keep stock prices rising. Where does revenue growth come from with so many people unemployed or under-employed?
One observation is that personal balance sheets have improved, allowing for some growth in consumer spending and globalization is providing opportunities. Another observation is that housing prices have kept personal balance sheets (net worth) from improving even more. Finally, during this current ‘recovery’, firms have not been hiring like they did in past recoveries – thus the employment challenges. The slower hiring comes full circle to the high profit margins. The interpretation is that we are experiencing a slow, steady recovery. Economics as a science does not encompass predictions, but continued steady growth could be very good in the long term.
The S&P 500 has a higher concentration in financials (particularly banks) than does the American Heroes portfolio. Currently, there are no banks on the American Heroes watch list that make a compelling case for being added to the model. There are a couple to consider, but it appears to us that some of the other investments have stronger merits right now.
