Thoughts on Building a Business

These days are challenging for many businesses, but some are getting super-creative and trying to take advantage of our new “covid-induced” environment. I am continually amazed when I see what businesses are doing to not just survive, but thrive. Some people thought I was foolish to launch Pawleys Investment Advisors on the tail end of the 2008-2009 recession, but I saw the timing as just right. Here are some thoughts I shared in a podcast interview with ETF.com last month on delivering good results and great service to clients – I believe they translate across into just about any type of business:
ETF Working Lunch – Kathryn Schwartz

Pawleys 2020 Mid-Year Actions

Hopefully everyone is staying safe and healthy during this challenging time. The toll of the quarantines and shutdowns from covid-19 has been significant – physical, psychological, emotional, and financial. But I have also witnessed amazing acts of kindness, paired with people re-evaluating priorities and coming together in ways that had perhaps been missing.

Most of you know I am not an advocate of timing the stock market unless we have a significant pullback when the underlying economy is expanding. In 2011, 2015, 2018, and now in 2020 I recommended that clients with the means and fortitude add to equities by purchasing shares of SPY, the S&P 500 Index ETF. On March 19th I stated that we needed two things to signal some type of bottoming in the markets – better news on the medical front for covid and 2 consecutive solid up days in the markets. We quickly saw initiation of vaccine trials, and those two solid “up” days occurred on March 24th-25th. Adding to SPY is a quick and cost effective way to increase equity exposure. But you all know I am an active manager who invests in individual stocks of companies with little or no debt, good earnings growth and solid cash-flow. We have seen Q1 earnings and are soon entering Q2 earnings season. So what are our next steps for 2020 and reasons for mid-year portfolio changes?

DEBT: I am monitoring our holdings to see if companies are adding to debt to finance operations, and what impact that has on their overall financial health.

EARNINGS: There are, in my opinion, two important ways to look at earnings during this unique time. First, I am evaluating current stock prices relative to full-year 2019 earnings. Second, I am looking at the speed and amplitude of Q1 and Q2 drops in earnings, and will also monitor the speed and amplitude of Q3-Q4 recoveries.

NEW LANDSCAPE: The quarantines and shut-downs forced our economy into suspended animation in a severe but temporary way. After indiscriminate asset liquidations in late March, the US Government stepped in to back-stop the economy (as did Central Banks across the globe). The yield curve is upward sloping, and in May the Leading Economic Indicators advanced +2.8% (following the covid-induced drops in March and April), both indicating a healthy economy in this opaque time. That being said, the new landscape we are entering will affect companies in different ways. The strong will get stronger, some will not survive, and many will fall somewhere in between.

For the second half of 2020, we will be making adjustments to individual stocks based on clarity that starts to reveal from the above, and shift SPY monies over into individual stocks. It is so important to act with a clear head during challenging times such as these. But we will come through this difficult time and enter our next great economic expansion…and we will grow as individuals and communities in amazing and meaningful ways.

Please see below for more detail above the above references and my complete stream of communication about the markets during covid-19:

Pawleys Covid Market Communications 2020

Vertical Merger Landscape and ESRX

On March 8th, Cigna announced it will buy Express Scripts, giving ESRX shareholders a combination of cash and CI stock. The deal, expected to close before year-end, will represent the 10th buy-out of a Pawleys Growth Fund holding at a significant premium for our investors. This is a stunning accomplishment, given that we typically hold a concentrated portfolio of only 20-25 different stocks, and just launched in 2010. We have a systematic process which strives to identify stock of companies with little or no debt, good earnings growth, and rock-solid cash flow. We never take a position in the hopes that it will be bought-out, it just happens that our methodology has identified stocks that others deem to be very valuable. The initial Cigna offer represented a 31% premium for ESRX shareholders.
Recently there have been a few landmark anti-trust cases that have gone in favor of corporations merging with or acquiring other companies. For example, the U.S. District Court in Washington court approved without any provisions the AT&T buy-out of Time Warner. A vertical merger occurs when two companies within the same industry but at different places along the supply chain come together, meaning they do not compete with each other and thus would not create a monopoly. This is a positive sign that the pending buy-out of Express Scripts by Cigna will be completed, since they are both healthcare companies but perform different functions. On July 12th, CNBC reported that the Department of Justice will not challenge the planned merger of CVS and Aetna, yet another positive sign for the ESRX/CI deal. Since ESRX continues to trade at a discount to the offer, we feel the market believes the deal will not go through. The market may also be worried about competition created by AMZN’s announced acquisition of PillPack. We recognize these risks but continue to add to our position of ESRX because we believe the stock remains undervalued independent of the pending CI acquisition. We are confident in our methodology of buying stock of companies with little or no debt, good earnings growth and rock-solid cash-flow. The landscape is ripe for additional mergers and acquisitions to occur, so we may see more activity with the Pawleys Growth Fund holdings going forward.

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