Here’s an update on some key holdings in the Reasonable Price portfolio for the month of August.
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Carters (CRI) announced an accelerated (share repurchase program). Several core positions were much weaker than the overall market. For example, KVH Industries (KVHI) dropped 9% to $12.76, and Macquarie Infrastructure (MIC) dropped 8% to $53.74 despite for the month increasing its annual payout to $3.52 (6.5% yield).
One of Peattie Capital’s primary goals is to participate in up markets while simultaneously protecting client’s investments in down markets, and I believe in concentrated portfolios rarely having more than 25 positions.
This concentration can also increase volatility, but if my analysis is correct, a year (or so) from now the question will be “why didn’t you buy more at those prices?” After all, it’s not whether you’re right or wrong that matters, but rather how much money you make when you’re right compared to how much you lose if you’re wrong that will drive overall returns.
I continue to believe that U.S. equities are a good place to invest today, particularly for anyone with a little patience. The S&P 500 Index has corrected roughly 4.5% from its recent highs earlier in the year, (1709 to 1633), and no doubt there could be more downside to the index.
On the other hand, stock valuations are a reasonable 14 times 2014 earnings, according to a recent Barron’s story titled “Fall Forecast.” In addition, a lot of money is rotating out of bonds and into cash in my opinion.
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On balance, I would prefer to see the U.S. Federal Reserve start tapering its quantitative easing program in September, because it has become such a lightning rod for the media and investors.
Remember, tapering doesn’t mean tightening; it means less easing, or to use one of Bernanke’s metaphors, less pressure on the accelerator. By definition there will be less liquidity in the markets, However, in my opinion, monetary and liquidity conditions will remain excellent thanks to a targeted Fed Funds rate remaining near 0% and a steepening yield curve.
Granted, the U.S. faces a litany of issues in both the near and long term. For example, Congress will be discussing the budget again soon, no one knows what will happen in Syria, and there are tremendous liabilities on America’s balance sheet (and off it too).
In addition, there is overwhelming evidence that interest rates will continue to rise, and the impact that might have on housing and other industries remains to be seen. Stocks have risen a long way from their March 2009 lows, when the S&P 500 Index bottomed near 670, so you could argue that the rally is overextended.
As far as I’m concerned, this fear is a bullish factor. When would you rather buy stocks: in 1999 when everything seemed great, or 2013, after the market has gone virtually nowhere for more than a decade and people are paralyzed with fear? I also believe the outlook is improving in foreign economies such as China, Brazil and Japan.
Regardless, I believe that paying the right prices to own the right stocks is a good approach to the market. Portfolios are always built and managed in accordance with specific goals and restraints.
The investments discussed are held in client accounts as of August 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
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