“Speak little, do much”
-Benjamin Franklin
Spring is finally emerging from a particularly ornery winter. The stock market has been equally unpleasant and the earnings results soon to be released aren’t likely to inspire. Weather will probably be blamed for tough quarterly results, and understandably so. More important to stock performance will be the commentary by company managements as they clarify the outlook for the intermediate term. We think that the long, slow grind of a recovery remains on track, but that earnings growth will be more second half dependent thanks to the slow start to 2014. Times like these create a disconnect between long term and near term results. To us, that signals opportunities that we’re seeking to exploit by focusing on fundamentals and not the predictions of market pundits.
Starting first with a review of company fundamentals, stocks owned in your portfolios reported better aggregate earnings growth in the fourth quarter of 2013 than had been achieved in the prior four quarters. We believe this indicates that the management teams of the companies in which we are invested are adapting to the slow recovery. Second, of the 38 stocks comprising Ayrshire Capital’s holdings list, 33 raised the dividend payout in the last 12 months by a median of 15%. Share repurchase programs have also been a part of capital allocation for many of our companies, with 22 of 38 reducing shares outstanding by an average of 4% in the last 12 months.
We have also been active making modifications to client portfolios. During the quarter we sold client holdings in VMWare and Hillshire Brands as the stocks had appreciated nicely and we saw more appealing opportunities elsewhere. Specifically, we purchased shares in Bank America (BAC), International Flavors & Fragrances (IFF), and WellPoint (WLP). BAC was purchased because we expected the bank to pass the Federal Reserve capital examination which would enable it to raise its dividend and repurchase stock (it did pass the exam and announced a dividend increase and share repurchase program). We purchased IFF because we are attracted to the characteristics of its business. IFF works with food & perfume companies to create tastes and fragrances that enhance product characteristics. Once an IFF compound is formulated into a brand the profitability and recurring nature of sales is very attractive. We added WellPoint, the parent of the Blue Cross/Blue Shield health plans, in order to gain more exposure to the health insurance market. As controversial as the Affordable Care Act may be changes to the market place usually create opportunity for well-run competitors.
Looking at the economic data and geopolitical landscape, an investor can find many reasons to pause. The Federal Reserve continues to unwind the Quantitative Easing (QE) asset purchase programs that were initiated at the height of the financial crisis. At her first press conference as Chair of the Fed, Ms. Yellen indicated interest rates could begin to rise six months after the QE programs are unwound, causing a mini panic in the trading community. We believe that the Fed is removing the QE program because the overall economic outlook is improving.
On the geopolitical front, there are many global issues rattling the market including the ongoing nuclear talks with Iran, Russia’s land grab of the Crimean Peninsula, and a weakening Chinese economy. However, we don’t believe investing around the timing of possible events is a winning long term strategy. Instead, we maintain our focus on properly allocating your money so that it can provide a risk adjusted return that satisfies your goals. To that end, we continue to believe equities are more appealing than bonds, but hope that as rates rise with the removal of QE we’ll be able to replenish some bond holdings where appropriate. We’ll end with a quotation from Mr. Warren Buffet’s yearend letter to shareholders: “Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.” We concur and will continue to focus on finding quality companies led by talented management teams that deploy cash flow in shareholder friendly ways.
Thank you for entrusting Ayrshire Capital Management with the management of your money. We look forward to speaking with you in the coming quarter.
Sincerely,
JM Sam Nevin, Jr.
Managing Partner
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