Investments
at MWS Capital advanced in the first part of 2015, favored by our strategy of
investing in businesses with lasting value. We achieved these results in a
neutral U.S. market, which is digesting the drop in oil prices, the strong U.S.
dollar and tepid forecasts for earnings growth. Nonetheless, our investments
have overall done better than the indices, which do not have broad earnings
momentum. Success this year lies beyond
the crowd and in unique investments with a global perspective.
Disney and Starbucks, our two largest growth holdings, have had
outstanding share price performance— 15% between the two. We have owned both
for years, validating our strategy of not disturbing seasoned investments in
immensely profitable All-American franchises. Of course, not every stock
performed equally; transportation stalwart UPS
declined 12%, paring its 120% gain over the last five years, amidst a pullback
in transportation stocks. With a 3% dividend and strong cash flow, we are
unwavering in UPS’s long term value even if the market is voting against it so
far this year. Disney, Starbucks, and UPS
are still way ahead of the market— +5.65% combined.
It is
taking time for cheap oil to translate into higher profits, even in the
transportation sector. The sudden drop has vexed industrial company boardrooms
conditioned to hedging high oil prices, as well as those who have benefited
from the U.S. energy boom, such as companies producing heavy equipment destined
for oil fields, or moving railcars of crude to refineries. Ironically, this
situation favors our investments in our largest energy holdings, Exxon and Chevron, which can now build
reserves cheaply while paying large dividends of 3.7%, nearly twice the yield
of the U.S. 10-year Treasury. We think that is a great value proposition—
owning financially strong oil majors who can build reserves when prices are
low, as well as paying a nice dividend in the meantime.
If
energy is 2015’s contrary investment, last year it was Europe. Our European
investments, 15% of our holdings, have achieved strong results. Our top five,
which include Roche, “German” Merck and
Maersk, have risen 12.5% on average. This is net of the strong dollar
versus the Euro; our investments have appreciated more in Euros, and the German
market has been one of the best performers worldwide. We take the position that
the weaker Euro creates a cushioning, long term “earnings bank” intrinsic to
our European holdings, that will be translated back to us in stronger Euros and
earnings. New additions include Daimler
and Airbus, each of which have raised business forecasts.
Our main group of ten smaller companies, an
eclectic mix ranging from trucker Heartland
Express (down this year- there’s that fuel cost conundrum again) to Snap-on Tools, to Estee Lauder in makeup, to this year’s runaway favorite, Churchill Downs, are up about 1.9% in
the aggregate.
What
seems to be the norm these days, persistent low interest rates, has given us
positive results in our typically higher earning fixed income investments. These
are allocated among corporate bonds, preferreds, global bond funds, and
individual municipal bonds. We prefer credit over interest rate risk, i.e.
taking advantage of relatively higher yields offered by certain borrowers,
because there is currently a negative term structure. This means
that investors are not requiring extra interest to lock up their funds for
longer rather than shorter periods. This is contrary to investment logic, since
rate and inflation risk increases over time. Therefore, we have intermediate
exposure of about 7 years. Our fixed income investments have already
returned over 2% as we start the year.
Which
bring us to the biggest story so far this year, the blockbuster merger between Kraft and Heinz. Our widely held
investment in Kraft vaulted 45% in three days. I am very pleased that so many
of our clients benefited from this merger orchestrated by Brazil’s richest man,
Jorge Lemann, and Warren Buffett. We
believe the fact that a locally based company could be worth so much more is
the correct narrative about the high potential value of the businesses we own.
We do not agree with entrenched economic skeptics, nor do we join the blind
indulgence in index funds and ETFs, only to get out when Apple or biotechnology stocks fail to deliver the kind of returns
that they have enjoyed during the last three years.
On Good Friday stock futures fell sharply
in a brief holiday session after a tepid employment report. Did Buffett call
off the merger between Kraft and Heinz? Did
oil stop flowing? Did Starbucks stop
selling lattes? No! Monday morning the markets reversed and bounded higher,
handing big losses to traders who overreacted to the employment report. The
lesson here is that investments should be based on businesses, not on computer
trading models driven by Twitter feeds. This distinction is lost in today’s
herd mentality environment. Instead of
being preoccupied with what others are doing, we humbly invest in high quality
businesses which will prosper in the long run. With patience, we have found that these goals are eminently achievable
and create lasting income and strong growth.
Matthew Shapiro
MWS Capital Consultants LLC
April 2015
Personalized
Investing, Planning and Consulting
Stocks,
Bonds and Mutual Funds for a Lifetime
Disclaimer—
Investing involves risk and past performance is no guarantee of future
results. Opinions in this report are
that of MWS Capital and we do not represent that the information is accurate or
complete, and is for informational purposes only. Before investing consider your objectives,
ability to take risk and our expenses. Performance presentations provided by us
are not in and of themselves a basis of selecting our advisory services, or a
guarantee of future results. Read our
ADV II form carefully. Investments in funds, stocks and bonds are not bank deposits
nor insured by the FDIC or other agency.
