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April 1, 2017

PMV April Month In Review

Macro

The economy and market continue to grind higher.

The U.S. economy continues its tepid expansion, with GDP increasing a modest 0.7% in Q1, due in large part to flattish consumer spending in February and March.  However, economists believe the first quarter weakness was impacted by residual seasonal factors and that economic growth will rebound this spring, pointing to continued rise in personal income, steady job growth, and high consumer sentiment.  We share this sentiment and remain fairly optimistic about the U.S. economy.  The equity markets broadly agree and continue their upward trend in 2017 on top of stellar returns last year, with the Russell 3000 up almost 7% YTD.

In addition, we are seeing the resurgence of growth and momentum strategies in the equity markets.  In fact, the Russell Mid Cap Growth Index has more than doubled Value YTD, and momentum strategies have even exceeded growth.  Overall U.S. corporate earnings growth seems to be improving and our PMV management team is optimistic about 2017.  However, the question remains how much of this good news is discounted amid the market’s appetite for growth and willingness to take risk.  It is difficult to stay grounded in this environment, but we plan to maintain our valuation discipline and are resisting the urge to trade-down in quality.  Importantly, we stand ready to take advantage of any speed bumps that may come our way.

Earnings

Generally, strong Q1 earnings help the portfolio pick up ground in April.

Earnings started off fairly well for the quarter with broadly more gainers than decliners.  Significant positive surprises included HealthSouth, Citizen’s Financial, Lam Research, BOK Financial, Borg Warner and DST Systems.  In-line to slightly better reports came from Gentex, Interpublic Group, and Robert Half.  Negative outliers were F5 Networks (slight miss vs. higher expectations stoked old concerns about industry transitions to the Cloud, though overall growth was steady), and Cardinal Health (lowered F’18 guidance on generic drug deflation and lack of major new generics in the pipeline).  In addition, our energy names, including Helmerich & Payne, sold off on mixed results exacerbated by a weak energy tape (slower recovery for oil than the market hoped for).

Portfolio

New ideas remain sparse, but the pipeline is growing.

The market’s advance ever-higher makes it challenging to find new ideas given our quality and valuation discipline.  As a reminder, with 35% name turnover we typically only purchase about 15 new stocks each year, so it is not uncommon to have slower periods.  However, our Watch List continues to grow.

We did add to Helmerich & Payne on energy weakness.  HP continues to gain market share in the top basins with their high spec fleet (U.S. land drilling days +25%) and we believe margin recovery is already underway, albeit slow and measured due to industry capacity.

Conversely, we exited our position of Franklin Templeton.  It has been a tough environment for money managers given lack of active equity flows.  Although Franklin has managed the pressure fairly well and still has over $8 billion in excess cash, they continue to lose AUM and have struggled with fee compression on their funds.  Given our exposure to the industry with Invesco and Northern Trust, we decided to take advantage of the recent stock rally and sell what had become the weakest fundamental story of the group.


The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.  Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice.