Moving late into the business cycle, Winthrop is taking a risk-off approach to equities. Planning for and initiating the reduction of such said volatility is imperative for our portfolios as we move into the 2H19. However, we don’t want to miss out on the upside movement as we still see value in markets. A few of the funds that we have been reviewing at Winthrop are the iShares Edge MSCI Min Vol USA ETF and the Invesco S&P 500 Low Volatility ETF for risk reduction. The SPLV Low Vol fund is what you would expect to see in such a case: 25% Utilities and 21% Real Estate. However, we think the USMV Min Vol fund is more attractive. This fund is sector neutral and screens for low volatility stocks within sectors to meet the strategies need without taking an over excessive weighting to low vol sectors. We see value left in IT, Communications, Industrials, and Financials. However, the weighting to those in the SPLV Fund varies with our opinions on markets. Both the low vol funds have consistently lower std deviations than the S&P 500. Yet, the USMV fund is accessible at 10bps of the cost of SPLV and offers a higher sharpe ratio than that of its peer and also the S&P500 over the trailing three years. As we continue to move through 2019, we will likely be moving allocations out of Large Cap S&P 500 ETFs and into USMV iShares Edge MSCI Min Vol USA ETF.
Growth stocks that will weather market volatility
DIS– The completion of the Fox acquisition and launch of Disney + are catalysts that will continue to provide momentum to the stock. The value of Disney comes from its platform and proprietary content. Disney’s assets enable it to create films, and then monetize the success of the films through attractions, merchandise, and TV series. Looking at its prior acquisitions, Disney has created value through Pixar, Marvel, and Lucasfilm. Through the acquisition of Fox assets, Disney has acquired Avatar, X-Men, Deadpool, Ice Age, Planet of the Apes, a number of TV series, as well as a controlling stake in Hulu. Additionally, the timing of acquiring new content is great for its upcoming Disney + service. In terms of gaining market share, we have to look at Netflix. Netflix has gotten constant praise for its original content, but licensed content accounts for over 60% of streaming hours on their platform. In the next 2 years, owners of the content may start pulling their shows, with Warner Media announcing they are pulling Friends from Netflix by the end of 2019. NBCUniversal plans to launch a streaming services in 2020. These companies own the #1 and #3 streaming shows on Netflix, Friends and The Office. When licensed content begins to disappear, subscribers may look elsewhere, especially with the continued price hikes. Disney + will be priced below Netflix. If the Netflix business model is unsustainable, DIS will benefit.
NKE– Nike is experiencing revenue growth across all measures and through each sector. In their most recent quarter, Nike reported a 4% increase in revenue, which was in line with estimates. Nike has been able to sustain high single digit growth in both their footwear and apparel sector. By geography, Nike has maintained explosive growth in China regardless of the ongoing trade war, with growth of 22% YoY to $1.70 billion, while consistently growing in North America, Europe, and Asia as well. They have a huge untapped market with the female consumer and have shifted that focus through Jordan sneakers for women, among other gear. Nike has often found themselves in controversies, and are very quick to react. They have taken a stance on the Kaepernick saga, Zion’s shoe issues, and the Betsy Ross Flag sneakers which highlighted their brand strength and appeal to the younger generation, which are additional points to our thesis. Nike was voted the top clothing brand (22%), top footwear brand (41%), and 2nd best shopping website by Generation Z in a survey done by Piper Jaffray. Although the stock is up 18% YTD, the stock has been depressed when compared to the consumer discretionary sector as a whole.
CSCO- Cisco has been a leader in the 5G build out across the US. Cisco benefits from 3 primary areas during the shift to 5G. Networking hardware (routers) will need to be refreshed in order to work with 5G networks. Cisco’s cloud infrastructure and data analytics traffic will increase substantially. Cisco has been the largest player in connecting “internet of things”, and 5G will allow for the full spectrum of capabilities to be used. While it has a high price tag, we like the recent acquisition of Acacia and their fiber optics portfolio for two reasons. First, fiber optics is a necessity for the entire build out of high speed data transfer because the current system cannot handle speeds over 200mbs (megabits per second). Most importantly, 25% of Acacia’s revenues are generated in China and this is an opportunity for Cisco to get their foot in the door. Cisco currently has very little footing in China with less than 5% of sales generated in the country.