During the third quarter we made an adjustment to the concentrated American Values model. There were micro or company specific reasons as well as macro or economic reasons for the change. Blackbaud (BLKB) was sold and Tessco Technologies (TESS) was bought.
Blackbaud provides client relationship management software and consulting to nonprofit organizations. Blackbaud’s price to earnings ratio (micro) has grown to an uncomfortable level and the prospects for rapid earnings growth to offset this imbalance are not favorable.
It is likely to take the nonprofit sector longer to recover from the sluggish economy (macro) since it is highly dependent on the for profit sector for funding. Therefore, nonprofits are less likely to consider adding or expanding on the expense side until they have more consistent income growth.
Blackbaud is a solid company and remains in the American Hero universe. It very likely could be a candidate again for the concentrated model in the right environment.
Tessco Technologies is in the communications consulting, acquiring, and installation business. Tessco has had a very strong total return for a number of years. Its fundamentals are solid and currently have one of the best fair value ratings in the technology sector. As of the end of the third quarter, the Technology sector was the largest and best performing in the market as defined by the Standard & Poor’s 500 (SPX).
Typically we use a fundamental approach to stock selection but at times the overall economic conditions play into our decision making process. The change described in the preceding paragraph is one example.
Another example is the decision made a few years ago to be underweight in the financial sector. For the most part that has been a positive for our performance except this year since financials have been one of the leading performers. The economy is still sluggish and it appears to be fairly priced relative to earnings.
The unemployment numbers just released point to continued growth but the economic growth has been much slower than earnings growth, therefore the economy needs to grow so companies can grow earnings just to maintain current values much less increase them.
Financials earnings have grown the most but that has been from a low base thus their values may be at more risk. We will be watching for opportunities in the financial area but have not seen any compelling ones yet.
The investments discussed are held in client accounts as of September 30, 2012. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Covestor believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
