How is it that a boutique portfolio manager from the quiet, beautiful coast of South Carolina has crushed the S&P 500 by an average of +5.95% since 2011? The Pawleys Growth Fund seeks to identify companies with low debt:equity ratios, strong earnings per-share growth, and solid cash-flow. The Pawleys Growth Fund typically holds 20-25 long positions at any given time. Why is this concentration of the portfolio important and how does it relate to the stunning eight buy-outs?
We use a strict, systematic selection process to identify growth-oriented companies that are reasonably priced. This non-emotional approach to investing is designed to beat the averages by holding best-in-breed companies across different sectors, and taking high-conviction positions. Index mutual funds and exchange-traded funds are riddled with mediocre stocks. As of this writing, there are 300 companies in the S&P 500 with earnings growth below 15%, and only 45 that exceed 25%. Why would anyone invest in a company that has shrinking earnings and gradually fading relevance? Anyone who invests in a tracker fund unknowingly owns these poor performers. Let’s review the returns that we have achieved for our investors over the past few years with the buy-outs:
Does the average premium gain for our investors of 43% for these eight companies get your attention? It should. This is a remarkable accomplishment, and speaks to the power of our stock selection process. The Pawleys Growth Fund is for investors looking for a repetitive portfolio process that takes calculated risks. Join us in the pursuit of beating the averages with wickedly smart investing!
© 2017 Pawleys Capital Management, LLC. All rights reserved. Total return figures are gross of fees which vary. Earnings figures are trailing 5-year earnings per share growth rates. Source S&P.
Last Monday, after an extended proxy fight, PartnerRe (PRE) announced that they would be bought by Exor for $140.50 per share. This sweetened offer to a previous Exor bid represents a 24% gain to the January 1st share price. The Pawleys Dividend and Pawleys Growth Fund use similar stock selection criteria: we seek to identify companies with low debt:equity ratios, strong earnings per share growth, and solid cash-flow. The Pawleys Dividend Fund typically holds 10-12 long positions, while the Pawleys Growth Fund holds 20-25 long positions. Why is this concentration of the portfolios important and how does it relate to PRE?
In each year from 2011-2014, the Pawleys Growth Fund has outpaced the S&P by an average annualized gross total return of 6.5%. During that time, we have had four holdings bought out for significant premiums – Par Pharmaceutical and Mediware Information Systems during 2012, and Questcor Pharmaceutical and Sapient during 2014 (total returns to the portfolio for each holding of 54%, 73%, 120%, and 44% respectively). If the PartnerRe/Exor deal closes, it will mark the 5th buy-out of a Pawleys Growth holding in 5 years. Given that we typically hold 20-25 positions at any time, in my opinion this is a remarkable accomplishment, and speaks to the power of our stock selection process. It gives me confidence that the criteria we use help identify companies that other entities find valuable.
There is much attention on the Pawleys Dividend Fund this year, as it is outpacing the Dow Jones Industrial Average by over 10% year-to-date (total return). But don’t overlook the Pawleys Growth model – despite a lag to our benchmark this year, the long-term performance trend is strong. We never count our chickens before they are hatched – but I believe five buy-outs in five years is a fantastic result.
© 2015 Pawleys Capital Management, LLC. All rights reserved.
Rising contagion in Greece and Puerto Rico drove U.S. equity markets lower as we closed out the second quarter and entered July. Here along the beautiful coast of South Carolina, most investors focused on these negative events within the global credit markets, and missed the positive local news. On July 1, Moody’s Investors Service upgraded the City of Charleston Water and Sewer System revenue bonds to Aaa. The system is now one of just 10 wastewater utility systems in the country to hold Moody’s highest possible rating. This news went mostly unnoticed, masked by the cacophony of Greece and Puerto Rico. Although news sources reported on these situations with typical fervor, neither should come as a surprise, as both entities have both been running out of money for years.
The equity markets seemed to remember this quickly and shrug off concern. Within a week, the Dow marched back above 18,000. Simultaneously, the S&P 500 volatility index (VIX), dropped throughout the month of June. As of yesterday’s close, the VIX stood at 11.95. Over the past ten years, there have only been three notable periods when the VIX stood lower; spring 2006, late 2006, and last summer.
The VIX merely measures expected volatility in either direction. But this low level, combined with the market’s resilience to this summer’s geopolitical speedbump, is very possibly an indication that we have entered what will become a strong second half of 2015 for the equity markets.
Source: Yahoo! Finance © 2015 Pawleys Capital Management, LLC. All rights reserved.