Investing and Economic Commentary

Scott Kays, CFA, CFP®

December 7, 2018

This year has been a tough one in a lot of ways for investors. For most of the year, the major indices were showing gains, but this masked a lot of turbulence going on under the surface.

Most people use the S&P 500, which consists primarily of large U.S. companies, as their reference for how the stock market is performing. The S&P 500 is a capitalization-weighted index, meaning the larger the company, the bigger its influence on the index’s return.

With recent market volatility, we are rolling up our sleeves and looking for bargains. Over the last week, we took the opportunity to liquidate both our Honeywell International (HON) and Autozone (AZO) positions, as they had exceeded our estimates of fair value.
Your team at Kays Financial likes to purchase businesses that benefit from long-term structural trends, so long as said businesses can be acquired at attractive prices. We think TE Connectivity (TEL) fits this bill reasonably well, and as such, we have recently added TEL to individual stock portfolios.
As you may have seen in your trade confirmations, we added a small position in Citigroup (C) this morning. Our bullish view on the stock is based on a number of factors including 1) an attractive valuation, 2) expected revenue growth with disciplined cost control, and 3) a significant return of capital to shareholders (i.e., through both share repurchases and dividends).
As you have likely seen in your trade confirmations, we are reducing our over-weight exposure to mid-cap ETFs and raising our exposure to small cap ETFs.
Many value investors like to talk about the concept of ‘time arbitrage’. The idea is that there’s an opportunity to earn outsized returns simply being more patient than the short-term oriented Wall Street crowd.
In an effort to keep clients better informed regarding changes in portfolios, we are continuing to send periodic updates after transactions are completed. As you may have already seen in your trade confirmations, we have recently sold Consumer Staples Select Sector SPDR (XLP),
You may have seen we recently added Apple (AAPL) to your portfolio. We view Apple as an innovative hardware, software and service company with a strong growth trajectory, trading at an attractive ~15.0x expected earnings.
With a mixture of excitement and a touch of trepidation, we are wading into the great Facebook debate. Warren Buffett famously said that it’s wise to be ‘fearful when others are greedy and greedy when others are fearful.”
A pull-back in the equity market can be psychologically painful for those focused on the short-term, but it also can create opportunities