Lagging Stocks Overshadow Bond Performance

March 12, 2019

 

News

 

Hello everyone! The CSUF Student Managed Investment Fund is back with an update for February. Enjoy the read!

 

Starting next week, we will begin preparing for the CFAOC Quarterly Performance Update which will occur on Friday, April 12. We will join other universities in Southern California, including UC Irvine, Chapman, Cal Poly Pomona, Cal State Long Beach, and UC Riverside. For those interested in attending, please mark this date on your calendar. We will announce the location once it’s finalized.

 

The overall market has performed well in 2019 following the massive sell-off in Q4. CSUF SMIF's portfolio under-performed against the benchmark by 330 bps since inception on December 28, 2018. This performance was largely attributed from our equity portfolio, as the equity benchmark outperformed us by 450 bps. 

 

Portfolio Performance (02/01/2019 to 02/28/2019)

 

 

Equity

 

The reasons for our equity under-performance may be attributed to our significant allocation to value securities. Thus far, value stocks have not performed as well as growth, and our overweight in consumer staples while being underweight in the information technology, consumer discretionary, and industrial sectors have hurt us. Going forward, we are looking to trim down our consumer staples allocation and add more growth-oriented companies to our portfolio.

Leaders

ITA Killing It Again!

Our iShares US Aerospace & Defense ETF remains our top performer with a year-to-date HPR of 22.3%. Boeing, the largest holding, is carrying the ITA’s massive rally due to its benefits from military contracts and strong backlog. During the month, Boeing secured a deal with the US Navy to build an autonomous Orca Extra Large Unmanned Undersea Vehicle beating Lockheed Martin for the contract. Moreover, Boeing won a $805 million contract with the Air Force to build Stingray drones. Finally, Boeing is working with NASA to produce the Space Launch System Core Stage.  

 

Salesforce on Cloud 9

Salesforce remains as our #1 leader in the portfolio because of their positioning in the cloud applications market along with their large portfolio of products. The company is one of the fastest-growing large-cap software companies by cross-selling products, international expansion, and integration of AI. Their recent acquisition of Mulesoft contributed to $181 million in Q4 and $431 million in fiscal 2019 which exceeded expectations and can be a major growth factor to Salesforce in the future. The competitive advantage that Salesforce has compared with their competitors makes this company a strong long-term investment.

 

PayPal Continues its Rise Despite Competition

Paypal has shown itself to be very resilient. Its price has continued to rise since the December selloffs even while CEO Dan Schulman reaffirmed that its Venmo component wouldn’t be profitable over at least the next one or two quarters. The European Central Bank reiterated its intentions to push the TARGET Instant Payment Settlement system which is a direct competitor to Paypal’s services. Nevertheless, Schulman believes the industry will continue to grow with Venmo expanding its network and reaping the rewards.

 

Ecolab’s Clean Rally

Ecolab extended its rally in the month of February with a 6.26% gain. To address the changing energy industry, Ecolab is spinning off $2.4 billion oil-drilling chemicals business into a separate public company. Also, the company acquired Lobster Ink to strengthen the service offerings to channel partners and end-user customers. Ecolab released Q4 earnings during the month. Ecolab’s adjusted EPS of $1.54 is in line with analysts’ expectations. Furthermore, quarterly revenues were up 3.1% compared to the previous year with revenues amounting to $3.6 billion. Global Industrial and Global Institutional were the main drivers with segments growing 8.1% and 5.6%, respectively. Segment growths include solid growth from Water, Food & Beverage and Life Sciences units, while North America, Asia Pacific and Latin America provided significant growth.

 

Laggards

CVS Worries Investors as Business Outlook Dwindles

Shares of CVS plummeted after the Pharmacy Benefit Manager (PBM) & Pharmacy Retail giant announced earnings on February 20. Forecasted 2019 EPS came in between $6.68 and $6.88, strongly below Wall Street’s estimate of $7.41. The company attributes this dimming outlook to weaker pharmacy sales in long-term care facilities such as nursing homes and adult day care.

 

Furthermore, CVS faces a class action securities litigation in federal court pertaining to its 2015 merger with Omnicare, which may further threaten the stock’s performance. Investor sentiment about the company also waivers as the US Government is proposing legislation that would outlaw rebates between drug manufacturers and PBMS - a huge disruption to CVS’s core business. Moving forward, CSUF SMIF will evaluate whether or not the company’s long-term strategy will provide enough support to hold the position.

 

Service Corp Delivers Poor Returns

We recently added Service Corp. into our portfolio for an exposure to less cyclical sectors due to the uncertainty of the current economic environment. We believe this industry has a favorable outlook from a steadily rising mortality rate and Service Corp. is currently the market leader with a 16% market share. Unfortunately, the company missed the lowest analyst estimate of $0.56 with its Q4 adjusted EPS of $0.54 and missed revenue by $23.23 million. However, they still have a steady forecast for 2019. We believe Service Corp. is a strong long-term investment and will continue to hold onto the company.

 

United HealthGroup Catches a Cold

After its earnings report in January, investors maintained high hopes for the company’s 2019 growth outlook. Thus, United HealthGroup’s (UNH) stock price fluctuated around the $265 price range, providing steady performance during most of the month. However, shares fell during the last two days of February, giving the stock a -9.9% month-to-date return. This decrease was a result of Congress’ newly proposed Medicare-for-All Act, which aims to shift managed care coverage from employers to the government. Although the stock has reacted negatively to such news, the effect is more related to headline risk and will not disturb the company’s 2019 growth strategy. Thus, we expect shares to rally off these lows in coming months.

 

McCormick Looking to Spice Things Up

Last month, McCormick suffered a significant drop in its security price due to trade inventory reductions. However, during the month of February, it has made a significant recovery. McCormick recently presented at the 2019 CAGNY (Consumer Analyst Group of New York) Conference on February 20th. In order to continue growing, they plan on partnering up with Tasty, which is currently the number one digital food network having about 2 billion views a month through Facebook’s platform. Furthermore, they will be launching a new app called “Flavor Maker” to give customers easier tools to access and purchase their products. Despite the rocky start to the year, we believe that McCormick will perform well moving forward.

 

Fixed Income

 

 

Fixed Income Maintains its Stride

Continuing its momentum from last month, our Fixed Income allocation once again beat the benchmark by 15 bps while accepting a lower amount of risk. We believe our portfolio performed well mainly because the economy remains healthy. Consumer sentiment is projected to increase by 2.6% this year even though it decreased to 93.8 this month from economist’s projected 95.5 in January.

 

The decrease is in response to the partial government shutdown and volatility in the markets. Although there was some volatility during the beginning of the month, the markets began to stabilize as we neared the end of February and helped generate our positive returns.

 

Leaders

Our corporate selections, VCIT and HYG, performed well as the markets rallied throughout February and investors appear to be not nearly as fearful of a recession arriving within the near future. Additionally, Jerome Powell announced that the Fed would take a “patient” approach to raising interest rates, contributing to investors’ increase in risk appetite.

 

The Fed’s announcement has investors feeling at ease and has lead them to put their money into riskier investments. Investment grade and high yield spreads compressed during the February rally. This narrowing of spread signifies that investors are purchasing high yield and corporate bonds, decreasing yield.

 

IEI our US Treasury ETF has the least appreciation during the month of February. Treasuries possibly did not attract as much demand this period as positive sentiment about the economy shifted demand to more risky assets, such as corporate and high yield bonds.

 

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