Investment research is an ongoing process here at 228 Main. What opportunities might the fall have in store?
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portfolio themes
Portfolio Themes: December 2020
Our investment research process is bottom-up: we look first at individual companies, screening for bargains and dividends, checking out ideas, reading SEC filings and news reports.
But certain themes do tend to emerge, as favorable opportunities often cluster in one industry or sector.
Thinking about the big picture, it seems to us that inflation may surprise on the upside in the months and years ahead. The COVID-19 pandemic—suppressing activity on a global basis—may give way to a synchronized global recovery. With not enough production capacity attempting to supply material and goods through a transportation network constrained by the crisis, shortages may lead to higher prices.
Record tides of debt and monetary stimulus may create more purchasing power than there are goods and services to purchase. Therefore, we are striving to avoid low-interest bonds and other investments that expose us to the risk of loss from inflation.
Our most recent additions to the “buy list” reflect favorable valuations in companies we believe to be durable—and fundamental to our lives. We will still require food and shelter and medicine in the future; finding bargain prices in profitable, dividend-paying providers is a joy.
We have revised an older theme—airlines and related companies—to focus on those with the most durable balance sheets. The airline industry has faced new challenges in the pandemic, and an industry under stress presents an opportunity… but we need the companies to survive in order to live through the current difficulties. (Hence the focus on only the strongest.)
Certain natural resource holdings have become market darlings. We began investing in them years ago, sometimes adding at lower prices as we waited for the turn to come. Our patience is being rewarded, and we believe this theme has years to run.
This is not a comprehensive list, of course, but covers some of the dominant themes we are seeing today.
Clients, if you would like to discuss these or offer additional ideas, please email us or call.
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Portfolio Developments, Emerging Themes
This has been an eventful year in the markets, to put it lightly. Unforeseen events have had dramatic effects.
We wrote about some of the themes in our portfolios last fall. Airlines and biopharmaceutical companies both seemed attractive, with valuations at seemingly favorable levels. Needless to say, global pandemics turn out to be as great for biotechs as they are lousy for airline travel.
Our natural resource holdings had similar variation. Turmoil helped the shares of precious metal miners and hurt the shares of industrial metal producers as much of the global economy shut down.
We are keeping the long view in mind. The next energy revolution, driven by solar power and batter storage, will still require higher production of copper and other minerals. The decades-long trend toward higher levels of air traffic will resume. These are our views.
As we review the finances and prospects of our holdings and rebalance where appropriate, another theme has emerged. The shares of some basic kinds of companies, those involved in food and shelter and beverages, have gotten to bargain levels, in our opinion. It seems like it has been a long time since we felt that way, and we are excited to add holdings in these lines.
Last fall we believed that international equity markets had some attraction based on value compared to US holdings. We are more excited now about the emerging bargains we perceive here in the US.
Clients, these are the conclusions our principles and our processes are leading us to. If you would like to talk about this or anything else, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. .
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets..
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
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