Author: Leif Eriksen
Covestor model: Performance With Protection, Global Growth Brands
Disclosure: Long PLT, DGX, VIAB
Markets continue to reflect the weak and unsteady state of the global economy. Good news is rare and accompanied by heavy doses of skepticism by market participants. And even the most seasoned market observers seem confused by the week to week changes in market sentiment and action. The market may indeed climb this wall of worry but, to do so, it will have to deal with a steady downdraft of forces aligned against it.
Global deleveraging may be the most powerful force weighing on the market. Without the prospect of steadily shrinking interest rates and expanding private debt the economy will have a hard time growing rapidly enough to support share value appreciation. If that were not enough of a downdraft, the market is facing an aging population which is increasingly more interest in protecting capital than in growing it.
Yet, the market offers some compelling values and, assuming a modest economic recovery over the coming years, money can be made. One pathway to success is to buy good companies with growth prospects which exceed that of the economy as a whole.
For example, my recent purchase of Plantronics (PLT) for the Performance with Protection (PNP) portfolio reflects the company’s healthy balance sheet and its prospects in the mobile communication market. I also added Quest Diagnostics (DGX) to the PNP portfolio.
Both of its businesses – medical testing and electronic health records – will benefit from an aging population and a drive to control medical costs. Finally, I added Viacom (VIAB) because of its leading global entertainment brands which should both insulate it from much downside and allow it to benefit from a growing global middle class.
I won’t stick with good, secular growth stories regardless of valuation. The valuation of both Hain Celestial (HAIN) and Hyatt Hotels (H) had reached a point where I was concerned about downside risk. As a result I sold these positions and replaced them with DIRECTV (DTV) and Gildan Activewear (GIL).
In contrast to most of my investments in the Global Growth Brands portfolio, these two positions are defensive in that they represent good value in businesses which are not likely to be negatively affected by continuing weakness in the global economy.
On the contrary DTV stands to benefit from its strong position in Latin America and GIL stands to benefit from continued moderation in cotton prices. I also added to my position in Constant Contact (CTCT) after a severe market reaction to a purchase it made. Until next time many happy returns!
