The Peattie Capital Reasonable Price portfolio performed well in September, on the strength of several core positions. Peattie Capital believes in a concentrated approach, with most portfolios having only about 25 positions. As I’ve said, I believe good stock picking is the best way to approach the market.
Mako Surgical (MAKO) received a takeover bid from Stryker (SYK) for $30 per share. This is the third core holding in most Peattie Capital portfolios to be bought this year. The others are: Telular (WRLS), bought by a private equity company, and Heinz (HNZ), which was acquired by Warren Buffett.
Meanwhile a number of core positions have had strong months such as KVH Industries (KVHI), Carters (CRI) and Seagate (STX).
My reading of a variety of recent economic releases is that macro data continue to improve. The September ISM manufacturing index came in at 56.2 against a 12-month average of 52.4.
On the international front it’s the same story: Japan’s Tankan Survey (a measure of business sentiment) tripled to +12 in September, and is now at its highest level in six years. German unemployment fell last month.
Given the strong performance of the equity markets, it’s becoming increasingly difficult to find stocks that will double (or more) over the next couple years. However I believe there will be plenty of opportunities for good stock pickers.
My belief is that the combination of extraordinary liquidity, lack of investment choices, reasonable valuations, omnipresent fear, and underperformance by many professionals will provide support for the markets.
I also like that oil production and inventories are rising, with the result that the average price at the pump has dropped to $3.357 as of October 16 today from $3.773 a year ago, according to AAA’s Daily Fuel Gauge Report.
In my opinion, lower gasoline prices may give the economy a meaningful boost, as consumers tend to spend the extra income. When gasoline prices continue to fall, I would be very careful about stocks that are correlated to higher oil prices.
As for Washington, according to a recent Bloomberg report, since 1976 there have been 12 Government shutdowns and the S&P 500 rose an average of 11% in the ensuing twelve months.
It’s unfortunate that we went through yet another shutdown, however I am staying focused on good companies trading at attractive levels and my bias at this point is to to add new positions or increase holdings in existing ones if the right price presents itself.
Regardless, I believe that paying the right prices to own the right stocks is a good approach to the market.
JP Morgan (JPM) has consistently been in the headlines the past few years, and if there’s one thing I believe about stockpicking, it’s don’t trade on the headlines. Shares of JPM have corrected lows after news of the London Whale trade and resulting legal mess.
Broadly speaking I think financial companies will benefit from a normalization of interest rates, which will increase their net interest margins. The time frame for this is unknowable, but I have said several times that eventually I expect interest rates to rise.
In addition to basic lending, JPM has a strong presence in credit cards, private banking, and asset management, among other lines of business. As a general rule, in my opinion, financial companies are attractive buys when they are trading near tangible book value, and tend to be fully valued at about twice book value.
Despite JPM’s 27% gain over the past 12 months, it has dramatically underperformed peers Goldman, Sachs (+38%), Citigroup (+48%) and Bank of America (+55%). Furthermore it trades below them on a price/earnings basis and also price/book.
Going forward, I expect JPM to settle with the government on the current charges, possibly paying as much as $11 billion in fines. While this is a significant amount for a $200 billion (market cap) company, putting this chapter behind them will be a big plus, and likely lead to a valuation more in line with its peers, possibly even higher as management is very highly regarded.
The investments discussed are held in client accounts as of September 30, 2013. These investments may or may not be currently held in client accounts. Any investments discussed in this presentation are for illustrative purposes only and there is no assurance that any manager will make any investments with the same or similar characteristics as any investments presented. 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. Past performance is no guarantee of future results.
