Shaker Investments

Shaker Investments: Announcements, Updates, & Insights

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First Quarter Update - 2019

 
 

Dear Investor:

The first quarter of 2019 was a very good start to the year for the Shaker Fundamental Growth Strategy and the entire US Stock Market.  In the first quarter, US Equity investments reversed the losses suffered in the fourth quarter of last year. The pessimism among market participants in the fourth quarter reversed, driven by a more dovish Fed policy outlook, early signs of stabilization and potential improvement in foreign economies like China, and optimism around a potential US-China trade deal.

There is still uncertainty around these aforementioned drivers of the market upswing as they involve “potential” upcoming positive changes to the economic backdrop. For now, economic data has deteriorated globally and earnings growth for public companies is projected to materially slow relative to last year’s robust growth driven by lower corporate tax rates. However, thus far, Q1 earnings growth has been less than the rate of growth last year, but better than expectations.  We remain focused on working to capture the potential upside of further market gains if the positive drivers win out, while managing risks if the current economic slowdown causes further choppiness in the financial markets.

Strategy performance has benefited from our efforts to be more cognizant of sector diversification while remaining focused on investing in strong, growing companies. This has enabled us to perform well year-to-date in 2019 but with a different mix of stocks leading the way from 2018.  The big contributors to investment returns in Q1 were:

1. The Trade Desk (TTD) was our largest contributor to performance in Q1 as the stock was up 70.56%.  We took advantage of this price appreciation and sold shares of the stock while still keeping it as one of the largest holdings in the strategy.  TTD provides a software platform to ad agencies as well as individual companies that enables its customers to purchase and manage data driven digital ad campaigns. The global advertising market is massive and is undergoing a fundamental shift to digital. The Trade Desk continues to rapidly gain share as it helps its customers to manage advertising in a more efficient and cost-effective way.

2.  Paycom Software (PAYC) and Paylocity Holding Corp (PCTY) were the second and fourth largest contributors as they were up 54.45% and 48.13% respectively.  Both companies are rapidly growing cloud-based providers of payroll and human capital management software. They help to automate HR functions so employees can save time and companies can reduce costs.

3.  Costar Group (CSGP) up 38.26% was the third largest contributor in the quarter.  CSGP is the dominant provider of online information and analytics to the office, retail, land, and apartment real estate industry.

4.  Other significant contributors to Q1 returns were Ulta Beauty Inc. (ULTA), Worldpay (WP) and recent purchase, Arista Networks, Inc. (ANET).  The companies all conduct business in different industries and represent our commitment to invest in “best-in-class” growth companies across sectors.   

 

Investment Outlook

The US and most of the world is in the midst of an economic growth slowdown.  In the US, the principal cause of this slowdown is the interest rate hikes by the Federal Reserve over the last three years. Monetary policy is the key driver of swings in economic growth (with a lag), and beginning in January the Fed pivoted away from continuing its tightening cycle. Communications from the Fed have indicated an extended pause in rate hikes and an end to quantitative tightening of its balance sheet (QT). This shift should support better economic growth later this year and in 2020. For now, it appears that the current economic weakness will just be a slowdown in growth and not a recession.

The cyclical growth slowdown we are in is exacerbated by secular slow growth over the last decade due to limited productivity gains and slow growth in the working age population.  Companies can’t find enough highly skilled workers which often limits their ability to hire, and limits productivity of the workers that are hired. Weekly initial unemployment claims have now fallen to below 200,000, a level not seen since 1969.  This is good news and indicative of a strong economy, but it does limit growth unless we see an increase in productivity, higher labor force participation, or more immigration. 

Slow but stable growth has been and will continue to be good for corporate profits.  It is much easier for corporations to operate at closer to optimal profitability relative to prior decades.  We expect that these conditions will continue.  Q1 earnings season is starting and we are paying close attention to the results of companies in our strategy and for new opportunities that may emerge.  We are currently positioned with our largest sector weightings in Technology, Financial Services, Healthcare, and Consumer Discretionary.

For taxable account holders, we expect realized gains in 2019.  We have done a very good job of deferring these gains in prior years, but given some of the changes that we are making to the portfolio (focused on risk management of larger positions that have appreciated in price), realization of long-term capital gains is likely.

We look forward to updating you as the year progresses.

Sincerely, 

The Shaker Investment Management Team