Dear Investors, Dear Friends,
The month of May, in the end, proved to be subdued, with most indices ending up close to where they started the month. In the United States, the S&P 500 index is up +0.01%, the Dow Jones Industrials Index up +0.04% and the NASDAQ 100 down -1.65%. In Europe, the Euro Stoxx 50 down -0.36%, the CAC 40 down -0.99% and the Stoxx Europe 600 down -1.56%.
During the month, however, volatility remained high with most indices falling by 6 to 8% at some point. Considering the wreckage that occurred in April, this was a welcome respite in the midst of the storm. This is not to say that the same topics that have caused a lot of stress since the beginning of the year have stopped mattering, but rather that sentiment had turned so negative (both towards bonds and stocks) that an intra-month rebound was not necessarily surprising. By all measures, especially in the US, both retail and professional investors were incredibly pessimistic coming in the month of May, with fund cash levels more elevated than in April 2020, December 2008 and March 2003 (source: Bank of America Global Fund Manager Survey) and more than a third of all stock issues on the New York Stock Exchange (NYSE) and the Nasdaq hitting 52-week lows. These signs are generally good contrarian indicators for at least a strong rebound and at best a new bull market. Add to all this gloom and doom our trusted magazine cover indicator, with The Economist showing wheat bushels in the form of human skulls and Barron’s showing a bear’s paw and you had all the ingredients for a nice rebound.
Interestingly, just about the only buyers were the company insiders, with insiders buying among S&P 500 companies as high as 2020 and 2016. Notable among these was the technology sector, with insider buying hitting levels not seen since 2012, with the consumer discretionary and industrial sectors not far behind. At the opposite end of the spectrum, we find the Energy sector, which shows net selling at record levels (source: JP Morgan Equity Macro Research). The last interesting data point is that it seems that, in the US, retail investors (who had invested en masse since the beginning of the pandemic in early 2020) seem to have sold all their US equity purchases from the last two years (according to Goldman Sachs Global Investment Research). It obviously ended in tears, as temporary gains turned into gut-wrenching losses.
So what happens now? That’s a very good question. Central banks are still on the path of raising interest rates and inflation has only shown very small signs of abating. This means that the current rebound in equity markets will not be given much benefit of the doubt. As we wrote last month, “just like it is impossible to predict when volatility clusters start, it’s impossible to predict when this one will end. Ideally, you want to see a very big down day with high volatility and we have seen that at the beginning of the month of May. Time will tell.” Well, the good news is that volatility has receded, with the VIX Index peaking above 35 in early May only to end the month at 26. Still elevated, no doubt, but more livable for investors.
Among all the economic data, as earlier in the year, it is possible to find the data that will fit your narrative. For example, both Walmart and Target (two huge American chain stores) reported Q1 2020 during the month and both saw impressive fall in stock prices once they did (Walmart ended the month down 16% while Target ended it down 29%, not numbers you usually see associated with such defensive investments). Economic bears saw in those numbers the clear end of the bulletproof American consumer and the beginning of a US recession. Look closer, however, and the story is just not that simple. The numbers were bad because, essentially, both companies extrapolated 2020-21 demand into 2022 and it simply turned out to be a mistake. Americans had their fill of big ticket items (kitchen appliances, washing machines, bikes, etc.) and had already turned their sights to services (essentially, travel). Walmart and Target, in other words, simply bought the wrong things at the wrong time and will have to heavily amortize them. This, to us, is not an indictment of the health of the American consumer but more an indictment of the companies’ purchasing managers’ buying acumen.
The only thing we can say for certain is that the rest of the year will probably be as interesting, and sometimes as frustrating, as the first five months were.
As we had written back in April, “we are at a stage now where investors try to hide in the safest parts of the market, which in turn become much less safe as valuations climb to high levels. For example, a very good, defensive company like Procter & Gamble (think Gillette) is currently trading at 27x earnings with 5% earnings growth. In comparison, Alphabet (aka Google) is trading at 21x earnings with at least 15% earnings growth. Even in terms of Free Cash Flow Yield (our preferred measure), Alphabet trades at a higher number (which means it is cheaper). Now let’s be very clear: valuation tools are not timing tools. Just as Procter & Gamble was unloved in early 2021 (down 16% in a few months), Alphabet (and other quality growth names such as Microsoft, CRM, etc.) can stay unloved for a while as well. But, at some point, that gap must be reduced. It will probably be a combination of a correction in Procter’s stock and an appreciation of Alphabet’s stock, but it will happen at some point in the not-too-distant future. The trick, in these volatile times, is not to look too much at the daily variations, which can be very scary. “
In this context, we used the strength in defensive stocks to take profits on McCormick, the spice specialist, early in the month, for the second time since we started investing in the company, as the outperformance seemed to good to be true. As with all good companies, we rarely sell the whole position, but McCormick is back to a much more acceptable 2.3% of the portfolio. We used the proceeds and some liquidity to increase our investment in Amphenol, the connectors specialist (now a 3.8% position) as prices had come in from USD 87 to USD 72. We also initiated a small (2.7%) position in Fastenal, an industrial and fastener distributor that sells products in more than nine major product lines, including threaded fasteners (such as screws, nuts, and bolts), fluid-transfer parts for hydraulic and pneumatic power; janitorial, electrical, and welding supplies; material handling items; metal-cutting tool blades; and safety supplies. Think of a vending machine that, instead of selling candy and sodas, distributes screws, bolts and other necessities of any industrial product.
In Europe, we increased our investments in Euronext (twice during the month) and Akzo Nobel, two of our investments with the least demanding valuations. We also started a small position in Soitec, a French company that has developed an innovative process (called Smart Cut) that is used to modify silicon to allow for more speed and less power consumption. This is a more aggressive investment from a valuation perspective.
Finally, we had a takeover offer for one our positions, Swedish Match, the Swedish tobacco producer specialized in smokeless tobacco products (snuff and chewing tobacco). Philip Morris International, which was missing this fast-growing segment, made an all-cash offer at SEK 106 per share. While this may be seen as good news, we can only regret the lack of fighting spirit of Swedish Match’s management since we believe the price offered is much less than what the company is worth and which would have been an amazing compounder for us for years to come. Anything short of SEK 160 per share seems like a steal and we will oppose the takeover offer as it is structured today.
The FFM European Selection Fund was down for the relevant period (28.04.2022 to 02.06.2022) by -3.17% vs +0.48% for the Euro Stoxx 50, -1.31% for the Stoxx Europe 600 and -0.12% for the CAC 40. Year-to-date (31.12.2021 to 02.06.2022), the fund is down -17.14% vs -11.71% for the Euro Stoxx 50, -9.55% for the Stoxx Europe 600 and -9.12% for the CAC 40.
As for the FFM American Growth Fund, it was down for the relevant period (27.04.2022 to 01.06.2022) by -2.60% vs -1.98% for the S&P 500, -3.50% for the Nasdaq 100 and -1.47% for the Dow Jones Industrials. Year-to-date (30.12.2021 to 01.06.2022), the fund is down -22.08% vs -14.18% for the S&P 500, -23.62% for the Nasdaq 100 and -9.85% for the Dow Jones Industrials.
The FFM Global Quality Portfolio certificate closed the month of May in line with the markets with -2.95% against -2.21% for the MSCI World. Year-to-date, the certificate has lost -18.14% against -8.32% for the MSCI World.
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