December was another solid month for the Peattie Capital Reasonable Price Portfolio, in my opinion, capping off an excellent year. In 2012 my Covestor model was up 18.3% (net of fees) versus a rise of 13.4% in the benchmark S&P 500 Index (SPX) assisted by a 4.6% upswing during the final trading month.
I continue to believe there are an abundance of good investment opportunities right now, and I am optimistic for 2013. That said, a few of these names are very small and have been much more volatile than the S&P 500 index, and I expect that to continue. In the end, fundamentals and earnings will prevail, and that is where I will focus.
Headline risk will continue
While the last-second agreement by Congress succeeded in preventing the “fiscal cliff”, it remains to be seen what will happen in the upcoming debt-ceiling debate and numerous other headline-generating events. Active trading based on those headlines is a difficult strategy for making money as far as I’m concerned, and probably has contributed to the extraordinarily poor performance by most hedge funds, in my opinion.
I have stated regularly my belief that “if it’s obvious, it’s obviously wrong.” Or, as Ken Fisher said in a recent Forbes article, “If it’s widely known, it’s either wrong or will have little impact on stocks.” I couldn’t agree more.
Reasons to like equities
More importantly, equities remain, in my opinion, reasonably priced, with estimates for 9.8% earnings growth and nearly 4% revenue growth in 2013, according to FactSet Research (FT, 12/21/12), and according to Don Hays (“Relax and Enjoy It” 1/2/12), and US equities currently trade at less than 13x forward twelve month estimates. Interest rates have begun backing up, and when investors realize that their allegedly “safe” investments can lose value, I believe there could be an exodus away from bonds and into equities. There is no way of knowing when, how far, how fast, or even if they will continue backing up near term, but after a 29-year bond rally, in which the yield on the long bond dropped from roughly 14% in November, 1983 to 2.7% in November, 2012, my belief is that the bond run is at or near its end.
In addition, Federal Reserve policy remains ultra-loose, although the Fed recently tied interest-rate policy to economic conditions (unemployment and inflation) rather than a specific date (“mid 2015” in their September statement). China appears to have managed a “soft landing” and Japan’s new Prime Minister is viewed as “market friendly.” Domestically, there is a budding resurgence in the housing market, and car sales have been strong too. Not as easy to quantify, and admittedly highly unscientific, is my own experience in talking with clients, colleagues and friends, who consistently say that “things are getting better.”
Furthermore, in my opinion corporate balance sheets generally appear to be in very good shape, and I believe companies who have delayed spending and expansion plans may be more inclined to move forward now that some progress has been made in Washington. From a larger and very long-term perspective, it’s worthwhile noting that 47.6% of the U.S. population is 35 or younger (Source: Don Hays) and that global population is estimated to grow 25% from 2010-2040 (Source: Weatherford International, Investor Presentation 12/3/12).
By definition, I don’t know what surprises are in store for 2013, nor how the markets will respond to them. I expect to maintain my strategy of paying what I believe to be the right price to own the right names, based on as comprehensive research as I can manage. I am wary of bonds, and based on what I know today, expect to add to my highest conviction names if given the chance to do so.
When Tronox (TROX) was spun out of Kerr-McGee in 2005, it was saddled with a variety of liabilities, which helped drive it into bankruptcy a few years later. Subsequently, it re-emerged as a publicly traded company in 2011. There is an ongoing lawsuit which has helped drive the share price down to a recent low of about $15.
TROX is a cyclical company that makes products used in paints, coatings and various other items. As a result of a recent acquisition, it is now vertically integrated, which should help margin expansion, in my opinion.
TROX has a stated book value of $25, and the CHB bought shares at that level a couple months ago. It is a shareholder friendly company in my opinion, having split its stock 5-1, and declared a $1 (post split) dividend, which currently yields approximately 5% (as of 1/7/13).
Even after the recent bounce, the shares still look cheap to me, possibly very cheap if the housing recovery continues and the economy improves. TROX is expected to earn over $3 this year, and is cash flow positive.
Performance discussed is net of advisory fees, and includes reinvestment of dividends or other earnings. Past performance is no guarantee of future results.
The investments discussed are held in client accounts as of December 31, 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 investment decisions we make in the future will be profitable.
Any index comparisons provided in the blogs are for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factors.
Certain 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. The manager 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.
