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EOY 2019: By Itself, Remarkable Year; Broaden Out Your Horizon and Par For The Course

The Stock Market Review

This past year saw the stock market (as measured by the S&P 500 Index) gain more than 28%. It’s greatest rise since 2013’s gain of 29.6%. A tremendous year on its own but definitely less exciting when you put it into broader context (i.e., look beyond a twelve-month timeframe). Let’s dig deeper.

The best thing going for the 2019 stock market was it’s starting point. In today’s instant gratification world, we quickly forget what happened even yesterday, let alone way back in 2018. In September 2018, the S&P peaked (at that time). Roughly three months later on Christmas Eve it had bottom, nearly 20% lower. At the time, freaking people out, but in hindsight, this correction was setting the stage for 2019!

While 2019 was a phenomenal year, the reality is, the price of the S&P on December 31, 2019 was just up about 10% from its high set 15 months prior. With this being the case, the real question is why was our Christmas ruined in 2018 with such a precipitous decline to only see it all recouped (and then some) in 2019?

The stock market is considered a leading indicator. Meaning the prices/market valuations are driven not only by the current fundamentals of companies, but maybe more important, the forecast for the future. Remember, in 2018, we were knee deep in a trade war with our largest trade partner… China. This was freaking people out!

In addition, there were fears of a global economic slowdown as Europe (and Asia to a certain extent) have continued to stumble not only from a production standpoint but economic policy as well. Also, there were concerns the Federal Reserve (“The Fed”) would tighten monetary policy (i.e., raise interest rates) when they should maybe be loosening.

Needless to say, none of the above fears materialized. Most importantly, there is a phase one trade deal with China and the Fed began lowering interest rates. These event(s) plus starting at a recent low, helped set the stage for the great returns of 2019… now what to expect going forward.

It is a fool’s game to try and predict the direction of the overall stock market in the short-term, but we will point out the facts we know about today’s market and what events may impact the stock market in 2020.

With a near decade long bull market and coming off a fabulous year like 2019, the natural inclination would be to assume 2020 has some tough sledding ahead. Many people will adopt this thought process and sell at any hint of negative news. Well, the reality is, even with this bull market and the recent run up in 2019, the stock market is coming off a 20-year period of underperformance.

This chart to the right shows the many up years for the S&P since 1997. But, when you look at the past two decades, the average annualized return of the S&P is just below 6% (if you include dividends, just below 8%). Both of these figures fail to achieve the 9 – 10% historical average annualized return of the S&P. From a technical standpoint, the 28% return in 2019 really just helped the S&P start catching up to its historical average.

On top of this backdrop, the things to watch for in 2020 are:

· Interest rates: These are always a factor in the direction of the stock market. At historical low levels, today’s rates are a strength for all things business… including the stock market. The Fed’s moves here (most likely lower) will impact the direction of the stock market.

· Trade agreements: The President continues to re-work these. The progress made here will continue to be applauded by the stock market and vice versa.

· Global markets: Europe and Asia are struggling (especially compared to the US). Their ability to improve their economies is something to watch.

· Presidential election: While this won’t occur till the 4th quarter, it will most definitely impact the stock market.

For the stock market as a whole, 2020, will be an interesting year. The strength of the US economy cannot be denied. And this is a great place to be investing (not just for 2020 but for years out). You have to feel very comfortable with the long-term possibilities. But we are living in some crazy times with many unsettled issues and potential roadblocks. A turn towards a negative outcome and no doubt the short-term market will reflect it. On the bright side, this should provide some investing opportunities in great individual companies with tremendous long-term outlooks. We just need to navigate the choppy waters.

New Investments In 2019

Speaking of opportunities, as is typical of our investment approach, in 2019 we had very little activity. We continue to buy long held positions for new clients when the price is right. In addition, we are always trying to identify quality companies that are participating in investment themes with long-term potential. In 2019, we managed to find four new positions that not only fit our themes but were trading at the right price (for us).

Here’s a little background on each:

Levi Strauss & Co. (LEVI)

Nearly 170 years after its founding, LEVI has finally become a public company. Well, they actually had a stint as a public company only to be taken private… so this is their second go around coming public in March 2019. As most anyone, we are very familiar with this infamous clothing brand and after completing our analysis we began adding the company to our portfolio in April.

LEVI reminds us a lot of Nike. It clearly is a valued brand that also has embraced the digital opportunity present these days. The ease with which companies can sell direct to the consumer (DTC) is only going to benefit those with a sizable following. The two biggest benefits of a successful DTC program: 1) Tight relationship with customers, and 2) Improved profit margins. Nike has exhibit this for a number of years already and we see no reason why LEVI won’t experience the same.

In addition to the DTC opportunity, LEVI is at the beginning of a world-wide expansion. Opening up new markets around the globe combined with a DTC strategy should only grow this already proud brand. For us, it’s all about management’s ability to execute that will drive the level of success LEVI experiences over the next decade.

Rollins, Inc. (ROL)

A collection of pest and termite control businesses headlined by the brand Orkin. ROL is a company we’ve had our eye on for many years, but recently started buying last June as the valuation was more to our liking. This company fits an investment theme we have benefited greatly from over the years… Home Related.

There was an old statistic (not sure if it’s still true) that a home is rebuilt every 17 years. Whether the number is accurate, who knows… but the idea is the same. Any company that is involved in fixing/building a home or servicing a home, it is worth a look as an investment. Needless to say, ROL fits the bill and they just so happen to be a well managed business. We look forward to ROL being a solid addition to our portfolio for years to come.

PayPal Holdings (PYPL)

For nearly the past decade the world’s move to credit/debit cards from cash continues to pick up speed. We’ve been fortunate to benefit from this transformation with our investments in Mastercard (MA) and Visa (V). In 2015, EBay spun off PYPL. While we have owned a bit of it from that point, it was not till this past year did we add new money to it.

While PYPL is a different animal than MA & V, they will still prosper from this continued migration to plastic from cash. And what pushed us into the stock at this time was their continued innovation. While they are in their infancy in monetizing Venmo, it is remarkable over 50 million people use this application. There is no doubt PYPL will have a say in how the world pays for things in the near and long-term future.

The Charles Schwab Corporation (SCHW)

When we made our investment in SCHW in September our thought was to get in early as we view SCHW transforming from a brokerage firm to a full-blown bank. For reference, banks basically make money on interest… so, the more deposits/assets it can bring in, the more money they will make. While banks are not historically super impressive investments, the thought of investing in one of the world’s great asset gatherers as they make their march from broker to bank is very appealing to us.

Fast forward two months and it appears we might be onto something here… SCHW made a buyout offer of TD Ameritrade. This is the second part of our thesis… it’s not just about bringing in assets. In today’s world, in our opinion, people’s investment accounts (especially retirement) are at the center of their financial well-being… it is no longer their savings or checking accounts. Furthermore, it will be the goal of all financial institutions to house all of one’s accounts. Well, the financial firms with the investment accounts already seem to have a leg up on the traditional banks as they all strive to be your all-inclusive financial home.

In summary… we are comfortable with these new investments and look forward to adding to these positions when/if future opportunities present themselves (i.e., short-term discounts).

Have a wonderful 2020 and we look forward to connecting with you throughout the year!


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