Market Comments: Where do we go from here
- If the yield curve inversion is accurately telling us a recession is looming (unsure), we don’t feel this is a reason to change portfolios immediately and that we have some time to take measured decisions.
- It is estimated that roughly 70% of the trading on the NYSE is from ETF trading and computer-driven/programmatic trading (commonly referred to as “algos.”) While many hedge fund managers believe they have the secret sauce, in reality, many use similar factors and essentially trade trends. Think risk on and risk off. Certainly the inversion is one of those factors, weakness in financials, etc.
- In the short term, the last low of the S&P was 2,822 in the recent sell-off. Floor traders will look to this level for support. 2,800 is a psychological level and most likely a factor for the algos. 2,795 is a key technical support level.
- The Street has an estimate for the S&P for next year of $177. With a close of the S&P of 2,840, we are now at 16x earnings (just below the 5 year average of 16.5x). If we are on a more serious slowdown (unsure) and earnings come in at $170 next year, the 2,800 level would be at 16.5x. This is a key level to watch and we think we may rest.
- We are in for bouts of volatility, both up and down. Stick to asset allocation and risk for clients and let them know that we are monitoring the economic and market levels very closely. We want to scale new cash and cash from sidelines in as the market approaches these levels.
Takeaway: Take a deep breathe. Market timing is a sucker’s game.
LOW (one of the largest positions and only retailer in the growth strategy)
- Lowe’s is the second largest home improvement retailer in the U.S. behind Home Depot. It also has stores in Canada under the Lowe’s and RONA brands, as well as a small number of stores in Mexico, which it is looking to divest.
- Lowe’s has always been a decent company and a good investment, but it has played second fiddle to Home Depot for a long time in terms of in-store experience and financial performance. Last year it hired Marvin Ellison as its CEO. Ellison had previously spent over a decade at Home Depot and is bringing the operating and merchandising principles he learned at Home Depot to Lowe’s.
- There was a lot of initial excitement among investors after Lowe’s hired Ellison and he laid out his plans for turning the chain around. That initial excitement eventually faded after investors realized that the turnaround would not be a quick fix. Some of that excitement came back after Lowe’s reported a strong Q2 earlier this week. Although the turnaround is still in the early innings, Q2 performance was very encouraging, especially considering how many initiatives the company has underway. We get the sense that Ellison is running a very tight ship and is taking the right steps to shrink the margin gap with Home Depot and generate more consistent performance.
NICE (recent purchase in the international strategy)
- NICE is a Nasdaq listed Israeli company that develops call center and financial crime & compliance software solutions.
- NICE is the market leader in call center workforce optimization and workforce engagement management software, which helps call centers get the most out of their agents. Following NICE’s acquisition of inContact in November 2016, it has also become a provider of call center infrastructure through a cloud offering, which is replacing on-premises solutions. NICE currently has a relatively small share in the fragmented call center infrastructure market, but we believe that it is well positioned to eventually become the leader in this large addressable market.
- We think that NICE’s CEO Barak Eilam is highly capable and a visionary. Many investors were initially skeptical of his transformative acquisition of inContact, but it has since proven to be a successful, and he also led the divesture of NICE’s non-core security solutions business shortly after becoming the CEO, which allowed the company to place greater focus on its stronger core businesses.
Novocure (NVCR): a repeat of last year’s pick. E still like it. It is one of largest holdings in our Special Situation Portfolio.
- NVCR has developed a cancer therapy utilizing electric fields which disrupt cell division limiting cancer growth. The Company call their treatment “Optune” and it has FDA approval for the treatment of glioblastoma and mesothelioma. NVCR is based on Jersey, The Channel Islands, and has its major manufacturing sites in Germany and in the U.S. in New Hampshire. There are virtually no side effects from Optune except for minor skin irritation if the electrodes are misplaced.
- Sales are projected to grow at 30-40% per annum even without new approvals. There are excellent potential catalysts: a.Clinical testing for the treatment of non-small cell lung cancer has been very encouraging. B. Medicare will begin to cover treatments starting on September first . C. At first, there was much skepticism about this “science fiction” treatment, but doctors have slowly come to recognize that combined with chemotherapy Optune has considerably improved survival rates for glioblastoma and now the newly approved mesothelioma treatment.
Disclosure: The Colony Group owns the above securities in client portfolios as of the date of publication. This report is published solely for informational purposes and is not to be construed as specific tax, legal or investment advice. It is not a recommendation to buy or sell any of the above securities. Information contained in this report is current as of the date of publication and is subject to change at any time. Past performance is not a guide to future performance, and market conditions can vary widely over time.