Cutler Commentary
Equity Income 2Q 2017 Commentary
July 12, 2017
The Amazon Market
As Amazon announced the acquisition of Whole Foods, the stock market seemed to change. No longer was Amazon just another competitor to other retailers. Amazon was a threat to the status quo. There seemed to be no limits to what Amazon could swallow. Are pharmacies next? Logistics? Cable TV? The answer may be ‘yes,’ but we would warn against hyperbole. The stock market has repeatedly demonstrated an ability to get ahead of itself. Perhaps the “Amazon” rally will be another example?
Living in Seattle, conversations about Amazon are a daily occurrence. Speaking with local executives at Amazon, it appears evident that the Whole Foods strategy is a “work in progress.” There are numerous opportunities for Amazon to integrate this acquisition, but exactly how will unfold over time. Amazon has also stated that Whole Foods current management will remain intact, implying a go-slow approach. Underestimating Jeff Bezos has been a losing strategy in the past, but the marriage of Amazon and Whole Foods will take some time to change the industry. It seems as if things are changing faster than ever before, and the pace of technological advancement is impossible to keep up with. We would caution against assuming the world is different overnight. When it comes to investing, we would also caution that fundamentals still matter. While fundamentals should account for large secular trends, such as online shopping, knowing how these trends will unfold is nearly impossible to predict. We prefer to invest in companies with as many “known variables” as possible. Cash flows, valuations, and dividends are all “known variables” that have historically added value for investors.
Equity Income Strategy
For the quarter, Cutler’s Equity Income strategy returned 1.78% gross (1.59% net of fees) versus the S&P 500 TR 3.09%. While the strategy lagged the S&P 500 during the period, the underlying reasons are worth noting. An informative comparison, the Russell 1000 Value returned 1.34% during the quarter. Once again, “growth stocks” were the primary market drivers. This is also most evident by the returns of the Information Technology sector. Through the first half of the year, the IT sector still stood at +17% year-to-date.
The weakest sector may come as somewhat of a surprise, as Telecommunications returned -7.06% in the past 3-months. Telecom is not a “dying” industry, and in fact, has become increasingly essential to our economy and everyday life. Cutler owns two stocks in this sector, the two largest, AT&T and Verizon. Each of these companies has a yield of over 5%, but underperformed the broader market. Why? Like so many industries, they are faced with intense competition (notably, price competition from T-Mobile) and a saturated market. AT&T has made strides to vertically integrate, such as their purchase of DIRECTV and the proposed merger with Time Warner. We anticipate further consolidation in this sector, with the weaker players such as Sprint likely acquisition targets.
We are continuing to review the retail exposure within the portfolio, and will adjust exposure to this underperforming sector as appropriate going forward. The only strategy change during the quarter was a reduction of the exposure to Texas Instruments. Originally added to the portfolio in 2008, Texas Instruments has more than doubled twice-over from the original purchase date. While an outstanding performer of the last several years, we reduced the weighting within the portfolio to “lock in some gains.”
Past performance is no guarantee of future results. All investments involve risk, including possible loss of principal amount invested. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be profitable or suitable for a particular investor's financial situation or risk tolerance. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Source: Morningstar, Advent APX, and Cutler Investment Group.
All opinions and data included in this commentary are as of July 11, 2017 and are subject to change. The opinions and views expresses herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This report is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase securities. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.
The S&P 500® Index is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. This index is not available for direct investment.
The performance information shown above has been calculated using the composite managed by the firm in the Equity Income strategy. Information on the methodology used to calculate the performance information and a list reflecting the contribution of all the holdings in the composite to the composite's overall performance during the time period reflected above, is available upon request.
Holdings are subject to change. Cutler Investment Counsel, LLC or one or more of its officers, may have a position in the securities discussed herein and may purchase or sell such securities from time to time.
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Disclaimer
These blogs are provided for informational purposes only and represent Cutler Investment Group’s (“Cutler”) views as of the date of posting. Such views are subject to change at any point without notice. The information in the blogs should not be considered investment advice or a recommendation to buy or sell any types of securities. Some of the information provided has been obtained from third party sources believed to be reliable but such information is not guaranteed. Cutler has not taken into account the investment objectives, financial situation or particular needs of any individual investor. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor's financial situation or risk tolerance. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.
