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2019 Q4 and Year-End Review
Review of the quarter including results, market commentary, portfolio commentary, and insights.
The bull market continued to churn higher in 2019, with the S&P 500 posting gains of 31.22% in its best annual performance since 2013. Torre Financial outperformed the market, with gains in client accounts between 34% and 46%, for an average gain on the consolidated accounts of 35.80%.
The year was full of concerns: a global recession, a trade war with China, and the impeachment of the president, to name a few. The long sought out bear, however, was nowhere to be found. Quite the contrary. The S&P 50 finished the year up 29%, while the Dow added 22% and the Nasdaq advanced 35%. European equities (Stoxx Europe 600) finished up 23%, and the Shanghai Composite added 22%. Equities were not the only asset class that performed. Broad indexes of American bond markets were up 9%. Commodities did well too, with gold up 18.7%, its best year since 2010, silver up 15%, and crude oil up 35%.
We have now gone on for a decade without an economic recession. While we don’t expect a repeat performance in 2020, we do believe the economy is strong and resistant to any drastic change.
We had strong performance across the board with our semiconductor picks as the industry took off in the second half of the year. Lam Research (LRCX) closed the year up 111%. Skyworks (SWKS) gained 78% for the year. Broadcom (AVGO) climbed 23%. Applied Materials (AMAT) shot up 82%, which was too rich a valuation and we ultimately decided to sell. Valuations are rich across the board. We’ve trimmed Lam Research slightly, and plan on taking some gains on Skyworks.
Our technology stocks also performed well for the year. Alibaba (BABA) posted gains of 55%. Facebook (FB) climbed 50%. We’ve been building a position in Alphabet (GOOGL), which climbed 27% for the year. Booking Holdings (BKNG) is a new addition this year. Booking owns well-known online brands including booking.com, opentable.com, kayak.com, and more.
Healthcare had an interesting year. Starting out soft, the healthcare industry was lagging the market for most of the year. Towards the end of the 3rd quarter things started to change. Abbvie (ABBV), CVS Health (CVS), United Healthcare (UNH), Johnson & Johnson (JNJ), Celgene (merged into BMY), Pfizer (PFE), amongst others, ended up posting strong gains for the year.
Our stalwarts, financial picks, and industrials all performed well for the year.
Our laggards were mostly concentrated in the energy sector. Antero Midstream (AM), Viper Energy (VNOM), Oasis Midstream (OMP), Centennial (CDEV), and Diamondback Energy (FANG). Most of these picks were opportunistic. We ended up cutting almost all of these companies early on in 2019, since they were deemed to not meet our quality bar.
Beyond what was mentioned above, we initiated new positions in Dollar Tree (DLTR), General Dynamics (GD), Cisco (CSCO), Intercontinental Exchange (ICE), and Digital Realty (DLR). These are all high-quality companies that we believe are well positioned for any economic environment.
We decided to cut FedEx (FDX) and The J.M. Smucker Company (SJM) due to poor execution and strong headwinds, respectively.
We’ve been taking a stronger preference towards high-quality, defensive companies at attractive valuations. We added to our positions in General Mills (GIS), United Healthcare (UNH), Pfizer (PFE), LabCorp (LH), Raytheon (RTN). We also added to Simon Property Group (SPG), which we see as an opportunistic play on high quality retail locations.
Our resolve to hold high-quality companies through adversity was tested at the end of 2018. We held on and even added to certain positions. While not all dips are meant to be bought, we did not see any major credible threats to the economy at the time. The headlines were loud and exaggerated. The concerns were merely hypotheticals. We strive to block out the media and focus our attention on the data to form our own fact-based opinions.
This same mentality served us well throughout 2019, as the economy continued to perform, and any risks were contained. The economy was underpinned with strong home sales, a strong labor market, increasing wages, low interest rates and more metrics. The trade war was a major concern throughout the year. Our take is that the issues were politically manufactured and could therefore be resolved just as easily as they were created. Our client portfolios were able to benefit from our holding steady throughout the year.
One of our main tenets is the idea that earnings and cashflow drive value (stock prices). In 2018, corporate earnings grew by 20%, and the S&P 500 lost 6.24%. In 2019, corporate earnings were essentially flat, with a mere increase of 0.3%, and the S&P 500 added 28.9%. While this may seem contradictory on the surface, it is really an insight into how the market functions. Markets are forward-looking and don’t care about absolutes. Markets focus on changes, good or bad. Throughout 2019, the strong economic backdrop reinforced a brighter future.
As the longest-lasting and most-hated bull market continues, investors tend to get anxious. Our job is to invest capital. Our investment methodology favors high quality companies, most of which tend to be defensive in nature. Approaching each position as an owner of the business, we look for companies that have a strong historical performance and a compelling narrative for the future. In assessing the historical performance, we look at multiple data points including:
Adjusted (EBITDA) and GAAP EPS, over the last 20 years
Operating and free cashflow per share, over the last 20 years
Revenue growth over the last 15 years
Gross and net profit margins over the last 15 years
Net debt obligations, primarily in comparison to market capitalization
Shares outstanding overtime, and, relatedly, stock buy-back programs
Dividend yield, dividend payment record, payout ratio, and dividend growth rates
To assess the future prospects of the company we look for broad trends across the industry, the track record of the management team, and the durability of any competitive advantages.
In general, we do not chase after home runs. We prefer steady and stable growth. We pick our companies as an owner would, planning over years as opposed to days or hours. Quality takes the spotlight during tough times. We believe that our portfolio companies provide the best balance of exposure to continued bull market, while at the same time providing protection against the inevitable downturn.