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

10th Announced Buy-Out for Pawleys Growth Fund Holding!

On Thursday, 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 for the fund, launched in 2010, given that we typically hold a concentrated portfolio of just 20-25 different stocks. 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 represents a 31% premium for ESRX shareholders.

Click here to see the take-overs and performance results:
Pawleys Buy-Outs

© 2018 Pawleys Investment Advisors, LLC. All rights reserved.

No Sleeping at the Wheel II

For only the second time since 2011, the equity markets have sold off more than 10%. Typically in a rising stock market driven by a growing economic cycle, we experience a 10-15% pull-back once every year. We view this type of market action as a healthy exhale. From historical highs set on January 22, the Dow Jones Industrial Average has dropped -6.72%, and the VIX, (CBOE Volatility Index) has spiked a dizzying 184%. We avoid making short-term predictions, but view this dip as what will play out as a very short-term technical sell-off. For the stock market to enter a sustained bear market, the underlying economy must first enter recession. Two things happen in advance of a recession – the Leading Economic Indicators drop for several consecutive months, and the yield curve inverts, which is a fancy way of saying short-term interest rates rise above long-term interest rates. Neither of these fundamental conditions currently exists, and we believe it will take at least 12-18 months for either of those two conditions to develop. Once the LEI’s drop and the yield curve inverts, it typically takes several months for the underlying economy to slow. We have gone on the record that the current secular bull market will last a minimum of 2 1/2 more years, and nothing in the markets or economy has fundamentally changed over the past two weeks to change that outlook.

The last time this happened was on August 21, 2015. The U.S. equity markets lost over 3% in one day, snapping investors awake from the lazy days of late summer. For the first time since 2011, the markets had dropped more than 10% from their recent all-time record highs. We published an article back then that we viewed the drop as a healthy exhale and a potential opportunity for investors to move cash into the market. Usually it takes 15% to get our attention, but a few key occurrences grabbed our attention that summer. That day, the VIX (volatility index) rose a dizzying 46%, and the breadth of declining stocks represented well over 90%. The yield curve was normal (upward sloping) and the Leading Economic Indicators were rising, so we viewed the sharp sell-off as short lived. A year later patient investors were rewarded with a 6% rise in the market.

© 2018 Pawleys Investment Advisors, LLC. All rights reserved.