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.

© 2018 Pawleys Capital Management, LLC. All rights reserved.

Pawleys Financial Vault

Several years ago, a client approached us and asked for help. She was worried that if something happened to her it would be difficult for her family to organize her affairs and close her estate. To further complicate her situation, she had only one child who lived out of state. In response to her needs, we created the Financial VaultTM, a comprehensive review and electronic archival of her complete financial and legal picture. We captured all of her sources of income, expenses, assets, liabilities, legal documents and other important information. Not only does the service provide peace of mind resulting from getting financially organized, but also from the fact that we have a complete duplicate inventory that is stored in secure, encrypted files. If home damage occurs from flood or fire, we have a complete record of everything.

So how does the Financial VaultTM process work in detail? The first step involves completing a full personal profit and loss statement (budget). We capture all sources of income such as earned income, pensions, social security, and rental income. We also capture expenses, including all monthly bills, insurance, real estate taxes, and any other costs. For items that occur semi-annually or annually, we adjust those amounts to a pro-rated monthly figure so we have a comprehensive budget that includes those one-off items. We collect and scan copies of all paper accounts for income and expenses, and inventory any online account information. The next step involves compiling a personal balance sheet (net worth statement) that captures all assets and liabilities. Assets include cash and investments, real estate, business interests, and personal property. Liabilities include any debts, outstanding loans or mortgages. Again, we complete a full snapshot and calculate personal net worth, in addition to taking inventory of all paper and online accounts. As part of the service, we also provide an overview that shows the asset allocation of all investment accounts. This ensures that the client is on track to meet their financial goals based on their situation and prevailing economic and market conditions. Basic asset titling is one of the most important aspects of estate planning, so we review how each account and real estate deed is titled in addition to making sure beneficiaries are current. Generally, we recommend using TOD (Transfer on Death) and POD (Payable on Death) features on investment and bank accounts. To complete the Financial VaultTM, we conduct a full inventory of important legal documents, and will refer clients to their attorney if needed. These documents normally include a Will, Living Will, Health Proxy, Trust Agreement and Power of Attorney. We list any important contacts and, if desired, last wishes information and letters.

Several clients have taken advantage of the Financial VaultTM. This year, we have added a new feature where, in addition to the personal p&l, balance sheet, asset allocation and legal inventory, clients receive two flash drives with encrypted copies of all the files and documents we have scanned. So now you have three protected sources – any paper files you have at home, the secure Financial VaultTM with Pawleys Investment Advisors that houses duplicate digital copies, and your own electronic safe. Please e-mail us today at info@pawleysadvisors.com to learn more. It’s time to fill your Financial VaultTM and give yourself peace of mind!