This is one of the craziest stories about the stock market ever!!! A big THANK YOU to WallStreetBets chat group on Reddit – this group has been buying a few stocks (most notably GameStop) to drive prices up and hurt the hedge funds who were betting against these stocks. FIZZ, (National Beverage, maker of La Croix) is one of the stocks being driven up. On January 4th, I bought shares of FIZZ for clients of the Pawleys Growth Fund at $84.50/share, and this morning sold half the position at $164.56 for a whopping +95% gain in three short weeks! I have done this a long time and rarely “trade” stocks, but this is amazing! WooHoo!!!
I believe the best defense when investing is to hold stock of high quality companies, and 2020 is again showing that to be true. Recently, Home Depot released solid Q2 earnings of $4.02 per share. Analysts from 27 Wall Street firms had projected numbers ranging from $2.33 to $2.97 – way below the actual results. Same-store sales were projected to have risen +11.4% – this equalizing revenue figure actually shattered that estimate, coming in at +23.4%. Home Depot has been a core stock holding for clients since I first started Pawleys Investment Advisors in 2010, and continues to deliver good performance for us. We are coming to the end of Q2 earnings season, and this has been a common trend where many companies have reported much better than expected earnings as the US economy re-opens. We are by no means past the difficulties presented by COVID-19, but we are quickly moving through these challenges.
In this unique environment there are many moving parts to assessing the financial health of both the overall economy and individual companies. I will reiterate that Central Banks across the globe have many tools available to help normalize economies, and they have made it clear that they will provide whatever back-stops are needed to support individuals, the private sector, and local governments. That being said, persistently low interest rates are likely here to stay, and present a challenge to investors trying to meet financial goals. At the end of the day, corporate earnings drive stock market prices. Through mid-August the Pawleys Dividends stocks, which most of our clients hold as a core of their portfolio, were up +6.46% for 2020, versus the Dow Jones Industrial Average, which is still down -3.25%. This is a fantastic result, especially after having returned +40.6% last year (outpacing the market by +14.8%). For every $100,000 invested, this is a net difference of several thousand dollars for both years compared to what an index fund would have generated. I don’t beat the market every year, but the 10-year track record speaks for itself, and we are proud but humbled to be able to generate such amazing returns for everyone. In my opinion, high-quality, US blue-chip dividend stocks continue to be the single best investment in the current environment.
Corporate earnings are what ultimately drive stock prices. Please be aware that with the upcoming elections many economic issues will become politicized in extreme ways, and as we all know, most messaging will come with a negative slant. It can be difficult to remain objective when emotions are running high, but any political back-drop should not play a role in how your investment plans have been crafted. The quarantines and shutdowns of 2020 came during a time when our economy was solid, and after a very short and severe recession, companies are pivoting where needed and finding new ways to conduct business in a safe way. It has been a long, challenging year, but we are grateful to be in a position to help everyone navigate both financial and investment decisions during this time. With the market having recovered, now is a good time to take money out of the market to meet any needs – a few of our clients have taken advantage of our gains and taken money out to pay off remaining mortgage balances, which is a critical goal for anyone approaching retirement.
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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