Results
The first quarter of 2021 ended on March 31st, 2021.
For the first quarter, the consolidated return for Torre Financial accounts was 6.54%.
For the same period, the S&P 500 (SPY) returned 6.35%.
The Dow Jones Industrial Average (INDU) returned 8.29%.
Returns for individual accounts may vary as each account is managed separately. While indices serve as a useful benchmark, each portfolio is tailored towards each investor’s unique investment objectives and risk profiles.
Market
The first three months of the year made for an eventful first quarter.
In the first week of the year, a riot led to raiding of the U.S. Capitol in Washington, D.C.
Retail investors through Robinhood, Reddit, and other platforms revolted against institutions, organizing to take down short sellers and taking speculative stocks like GameStop to astronomical levels.
Special-purpose acquisition vehicles, known as SPACs, became a commonplace strategy for emerging companies to go public, adding to the euphoric sentiment and speculative activity.
In March, President Biden signed a stimulus bill adding $1.9 trillion in relief support and unveiled a $2 trillion infrastructure plan, inclusive of a proposal to increase corporate tax rates from 21% to 28%.
As COVID vaccines proliferated, the economy prepared for reopening. As of March 2nd, Governor Greg Abbott removed restrictions on Texas businesses, allowing them to operate at 100% capacity.
The expected surge in economic activity, coupled with the generous fiscal policy, led to concerns about inflation. As inflation climbs, bonds become less attractive, potentially resulting in negative real rates.
After bottoming out around 0.50% in August 2020, interest rates on 10-year treasury bonds more than tripled to 1.72% by the end of March 2021. Bond yields rise as bonds sell off.
The increase in rates led to a correction amongst the high growth names, particularly in technology where multiples have come under pressure. As these companies invest in growth, they rely on their future cash flows which are further discounted as interest rates increase.
The market, however, continues to mark new all time highs as capital rotates from growth names into cyclicals, benefitting groups including financials, energy, industrials, commodities, amongst others.
Portfolio
Top performers
UPST - Upstart recently announced their first earnings as a publicly traded company. Results and guidance were optimistic, causing the market to significantly reprice shares. Shares are up 254% YTD.
FANG - Diamondback Energy, a shale oil & gas company operating in the Permian Basin, is benefiting from rising oil prices, likely in anticipation of increased economic activity. Shares are up 68% YTD.
SWKS - Skyworks is a semiconductor chip producer, providing critical components for connectivity including 5G, WiFi, Bluetooth, and more. Apple is a large customer. Shares are up 23% YTD.
GOOGL - Google is likely benefiting from the reopening sentiment. As travel increases, travel spend advertising flights and hotels is likely to return. Shares are up 22% YTD.
JPM - JP Morgan Chase is benefiting from rising interest rates. Banks make a spread, known as the net interest margin, between the rate they pay for deposits and the rate they receive from investing those funds. Shares are up 21% YTD.
Bottom performers
PAYC - Paycom is a high-growth company focused on providing human capital management solutions. Their revenue is a function of customers, the number of employees they have, and interest rates. They will benefit as employment and rates increase. They have likely been pushed down as part of overall rotation out of technology. Shares are down 17% YTD.
CRWD - CrowdStrike is a high-growth technology company in the cybersecurity space. Shares have been under pricing pressure due to valuation concerns and increasing rates. Shares are down 12% YTD.
DDOG - Datadog is a high-growth technology company focused on monitoring and analytics solutions. Shares have been under pricing pressure due to valuation concerns and increasing rates. Shares are down 11% YTD.
OKTA - Okta provides identity access management solutions for workforces and customers. They recently acquired Auth0 to extend their customer solution. Shares have been under pricing pressure due to valuation concerns and increasing rates. Shares are down 10% YTD.
ISRG - Intuitive Surgical is the leader in minimally invasive robotic surgery. Many surgeries have been deferred throughout COVID. Intuitive has established a strong, reputable presence in the space and benefits from various network effects. Shares are down 9% YTD.
Insights
It has been over a year since COVID-19 swept the world and provoked global panic.
It is important to have a plan to overcome difficult situations. A long-term plan helps control emotions and reactive behaviors. An investor’s behavioral traits such as discipline and foresight are important contributors to their success, maybe even more so than intellect and research.
Investors with deep-seated belief and personal alignment in their investments are able to see through noise and distractions. This personal conviction is advantageous in withstanding temporary drawdowns.
Having a long-term focus on investing has served us well this last year, as we kept portfolios invested throughout last year’s deep decline.
“Have a plan. You always have to have an idea about when you will buy or sell or do nothing in many different market scenarios. Having a plan in place and sticking to it during April and May of 2020 turned out to be very useful. Back then I removed my emotions from the equation as much as possible. It wasn't a popular stance to avoid the Covid rhetoric, but it was the correct one.
Above all else, know yourself. How you choose to invest should always come down to the type of person you are and what you can and cannot handle in the markets in terms of risk. Everything else will fall into place. It really can be simple. Forget about ‘projecting’ what might occur. Stick to the price action and follow what the view from 30,000 feet is telling us.”
- Fear & Greed Trader, This Week On Wall Street, Feb 6
In a related test of conviction, high growth technology companies such as CrowdStrike, Cloudflare, and Okta have been under increasing pressure throughout the end of the first quarter. The price action of high growth technology companies has been highly correlated to the movement in interest rates.
Jamin Ball, author of Clouded Judgement, notes:
“Over long periods of time the 10 Year Treasury and cloud multiples aren’t very correlated. However, there are times of extreme correlation. Since cloud multiples peaked in February the correlation between the 10 Year and cloud multiples is -0.95. This level of correlation is extremely high. Some attribute the start of the correlation to the point in time when the 10 Year started to maintain (and grow) above 1%.”
“Over a 6 year horizon, the correlation is not nearly as strong (-0.5).”
Many of these high quality growth names have corrected 30% or more from their recent peaks.
Fortunately, most managed accounts have withstood this dramatic rotation without causing too significant damage due in part to maintaining a diversified portfolio.
I believe this correction in technology companies is temporary and serves as an opportunity to build positions. Due to their unique offerings based on unique intellectual property, many of these companies have pricing power. Growing at impressively high rates and supported by secular tailwinds, they continue reinvesting, further strengthening their competitive advantages through scale. Many of these companies are transforming industries. Over the next five years, their growth will be transformative.