Author: Travis

Christmas is coming. The tree is lit. The stockings are hung over the fireplace. And we are looking forward to celebrating with family and friends. But even as we anticipate the joyous holiday ahead, the end of one year and the beginning of another, we like to take a moment to reflect on the year we had.

By all accounts, 2023 shouldn’t have been a great year for the markets. To start the year, interest rates were higher, inflation was not under control, and the stability and health of the economy was questionable. But Americans are resilient, as are many of the world-class companies that are based in this country. And we saw unprecedented growth from some of the biggest and most recognizable. The Magnificent Seven, as the media has dubbed them, are a group of companies that have returned an average of 70% year to date. This group includes Amazon, Apple, Alphabet, NVIDIA, Meta, Microsoft and Tesla. Of course, there are other companies that have had a great year as well, and the growth in the market has been broad, touching virtually every sector of the economy.

Good companies have a tendency to find success, regardless of the environment or economic headwinds they face. And even though we will always find reasons to be concerned about the future, especially with the ongoing conflict in Ukraine and Israel, we must remember that we control only the present. So let’s take some time this Christmas to bring more peace in our lives, thanking God for the blessings He has given us. After all, Jesus is the reason for the season, and He is the Prince of Peace.

We appreciate the trust you have placed in us, and we look forward to serving you in 2024. Blessings to you and your family this Christmas and in the new year ahead.

~ Steve Davenport, CFA

My first job out of college was at a mutual fund company. I had worked my way up to the portfolio accounting group, which meant I did a lot of number crunching and used a lot of spreadsheets. After a while, I realized that there were a lot of inefficiencies in the work that we did. So, I figured out how to do things faster and more efficiently. Eventually, I was able to complete eight hours’ worth of work in four. How was I rewarded for this workplace improvement? I got to do two peoples’ worth of work every day.

Regrettably, our world seems to gravitate toward complexity. I’m hard-pressed to think of any industry that has gotten simpler over time. Politicians make laws more complicated. The tax code grows in complexity every year. The number and kinds of financial products that are offered by banks, brokers, and insurance companies is impossible to track. Even our efforts to simplify our lives seem to backfire. Artificial Intelligence offers us the promise of making our day-to-day lives easier with self-driving cars and smart homes. Then our legal system struggles to adapt when AI runs amok, using copyrighted material without permission, plagiarizing works of others, and even making discriminatory decisions when corporations use AI to filter incoming calls.

Though it may be difficult, trying to simplify our lives is still worthwhile. This is especially true when it comes to investments. There are countless investments we can buy—mutual funds, exchange traded funds, unit investment trusts, annuities, and others—and endless variations in different packages for each of these. But inside almost all of them are the basic building blocks of all portfolios—stocks and bonds. The packaging makes the products salable, but most of the time, the packaging also makes them complex. That’s why we avoid as much of that as we can. We buy individual stocks for growth, for most clients and accounts, and we use bond funds—the cheap and transparent kind—when clients need income.

Many of the companies we own are also simple. Ecolab (ECL) makes disinfectants, cleansers, and soaps. Cheniere (LNG) transports natural gas. Chipotle (CMG) makes burritos. And even the companies that are racing to play in the AI space have a simple core to their business that allows them to invest heavily in projects like this. Microsoft (MSFT) sells software to support their AI push. Google (GOOG) sells advertising. And Amazon (AMZN) sells … well, Amazon sells everything else.

A paraphrased quote attributed to Albert Einstein says, “make things as simple as possible, but not simpler.” This is great advice, and it’s a philosophy we take to heart in the way we manage money for our clients.

Here’s hoping you are able to enjoy the simplicity of a beautiful and peaceful Thanksgiving and Christmas season.

~ Travis Raish, CFA

Our weekend started out with beautiful fall weather; cooling temperatures and leaves turning colors. Then came the news of violence in the Middle East. I don’t think anyone expected what happened. Especially for those of us living in the US, it can be hard for us to relate to this level of hatred. Didn’t the New Testament, Renaissance philosophy, or the examples set by Mahatma Gandhi, Mother Teresa and John Paul II serve as guidelines for how we ought to treat each other?

The military clashes between Hamas and Israel could eventually include Iran and Hezbollah in Lebanon. And while the humanitarian component of the conflicts is top of mind for everyone, it’s impossible to look at these conflicts and not also wonder about the economic impact they could have. As violence persists, the likelihood for disruption of the oil supply from all Middle East countries grows, making higher energy prices and lower supply probable. Of course, increased prices benefit the exporters of energy and it’ll be interesting to see how the US responds if we see rising oil prices in the future.

For exposure to energy companies, most of our clients own Chevron (CVX) and Cheniere (LNG) in their portfolios. Both companies have sustainable competitive advantages in their markets and trade at a very reasonable Price/Earnings (PE) of 11.5X and 11.8X, respectively, while the overall market is trading at a much higher PE of 18X. Chevron has built in a price of $70/barrel to earnings projections, and with oil currently around $85/barrel the company looks well positioned going into this uncertain period. And when we look across the portfolios to see which other companies might be affected by higher oil prices, like companies in transportation, heavy equipment manufacturing and construction, we feel the companies we own have done what they can to mitigate the unique risks they may have.

We cannot know how long the conflicts in the Middle East will last, and we cannot know what the outcome will be. But we will continue to hope and pray for a swift and peaceful resolution.

~ Steve Davenport, CFA

In the 1990s, Abercrombie & Fitch was one of the biggest clothing retailers in the US. Teens and twenty-somethings couldn’t get enough of their products, and the company had storefronts in shopping malls across the country. The stock was incredibly popular with investment managers too, and it was one of the few publicly traded retailers everyone wanted to own. But toward the end of the decade, the company published a catalog full of models showing more skin than clothes. It was so revealing, in fact, the company only offered it to patrons who came into the stores and presented an ID to show they were over 18. For a company marketing their products to teens, they had crossed a line, and everyone knew it.

Having a faith-based approach as an investor used to be simple. All we had to do was avoid certain industries like alcohol, tobacco, gambling and adult entertainment, and we were good. And fortunately for me, most of those companies never met my standards for quality anyway, so avoiding them was easy to explain in a secular context too. Occasionally, a company like Abercrombie would make a mistake, and it was easy enough to add them to the do-not-buy list. But in the universe of high-quality companies, those problems seemed few. We could count on executives to do what was right for the shareholders first. And if the corporations gave to charities and causes, they always asked if their decisions were likely to alienate some of their customers; if the answer was “yes,” they’d donate to something that didn’t put their reputation at risk.

Investing is more complicated today. Executives are far more likely to approve donations to charities and causes that operate in direct violation of the beliefs of some of their customers and shareholders. And for the person of faith, owning shares of these companies can be troubling. This is especially true if the company repeatedly offends that investor’s beliefs. After all, businesses are made of people, and people make mistakes. Most of us know this and we are often willing to extend our favorite businesses a bit of grace if they blunder—it’s when the blunders become habitual that we get discouraged.

Of course, there is little agreement even among people of faith about what is and what is not acceptable. Even so, for those of our investors who would like to put their faith first, we have crafted a new portfolio. We start with the same methodology that we use for all our portfolios. We still look for companies that we believe have a sustainable competitive advantage, that are the best or the only companies that do what they do, that are trading at a reasonable price given what we think the company is worth, that have good prospects for growth, that are profitable and that are financially healthy. We also balance those companies across sectors and industries such that the same forces that drive the US economy also drive the portfolio. But to this list, we also look for companies that show, through their corporate and community actions, a desire for:

1. Protecting Human Life
2. Promoting Human Dignity
3. Enhancing the Common Good
4. Pursuing Economic Justice
5. Preserving Our Global Common Home

If this portfolio interests you, then you might want to know these things as well.

• First, a company doesn’t have to support these virtues, but it cannot actively work against them to qualify as a company we might consider.
• Second, the portfolio will not look like the market and is unlikely to perform like the market. Secular investors do not value the same things faith-based investors do. So many of the largest companies in the US may not be included in this portfolio. For this reason, an investor with a faith-based mindset cannot invest with the goal of “beating the market.” It must be more about supporting companies that share your views about faith, life, family, community, virtue and stewardship; it cannot be about returns.
• Third, you may be surprised to see which companies make the cut and which ones don’t. You also may not be in complete agreement with us about the decisions we make. But like all things where your money is concerned, you can know that we have given each company a great deal of thought, and we have made the best judgement we feel we can, especially given the subjectivity of some principles.

If you have questions about this new portfolio, or have questions about any of our others, please contact us.

~ Travis Raish, CFA

We spend a lot of time thinking about the business side of the companies we own. Some have factories and inventory and manufacture products we use every day. Others provide services, or technologies that make our lives easier or our work more productive. All these businesses have the greatest asset a company could hope for—talented people. We know the companies we own are desirable. But I was recently reminded of another reason many of the companies we own are some of the best in the world. DBS, a Singaporean bank we own in some portfolios, announced that they are donating over $700 million to communities where they do business. I was struck by how hopeful and grateful the members of these communities were at hearing the news. DBS wasn’t just giving back, they were making an investment in their community, and people loved them for it.

I decided to do some homework on the other companies we own and I was pleasantly surprised with the results. Not only are the companies successful with their businesses, but many also have a positive impact on their community. Of the top ten companies for corporate contributions in America for 2021, we own seven (company name and charitable contributions shown).

Pfizer ….. $3.2 billion
Merck ….. $1.8 billion
Walmart ….. $1.4 billion
Google ….. $1.2 billion
Microsoft ….. $1.1 billion
Eli Lilly ….. $600 million
Cisco ….. $300 million

Collectively, they gave over $9.4 billion to their communities. Of course, companies need to watch costs and spend wisely on new projects. But there is also a need to help others. Individually, many of us are fortunate to have the resources to positively impact our communities. But it is also nice to see companies working to make a difference. I am continually impressed when I see these activities going on, especially given the global challenges they must deal with.

Total giving in 2021 by corporations was $21 billion, up 23% from the prior year. Company stock appreciation and an increase in corporate earnings positively impacted the results. When companies win, the communities around them also benefit. Pfizer has made considerable contributions, sending much needed vaccines to emerging markets. Walmart is actively giving food to food pantries. Microsoft donates technology to non-profits. These and other companies we own also give in many other ways, including supporting impoverished communities around the world and those affected by natural disasters. The commitment they have to helping people is admirable, and it adds to our view that they are leaders in their respective industries.

We think often about the economy, inflation and interest rates, how local and foreign policy will affect the future, and whether current issues like student loan repayments and forgiveness could have an impact. And beyond the macro issues, there are always a lot of important things happening with the businesses we own. But I am thrilled by the fact these companies also make investing in their communities a priority.

~ Steve Davenport, CFA

In 1994, I started working at Founders Funds, a Denver-based mutual fund company. We were across the street from Janus Funds, and a few blocks away from Burger Funds. There were other investment companies in the area too, but we all managed money the same way. We were all attracted to the same companies; namely those in the technology and communication sectors, because they had the highest prospects for growth. And in the late 1990s, we were there to witness and benefit from the Internet and Dot-com boom.

By the end of the 90s, we had some funds that were delivering returns of 100% per year to investors. The companies we bought inside those funds that performed the best were the ones that were the least connected to reality. In fact, there was a running joke among portfolio managers that at the first signs a tech company might turn a profit, it was time to sell and run for the hills. Investors much preferred the dream of something great to the reality of something potentially less exciting. These were the companies that started as scribblings on the back of napkins and were later funded by Bay Area venture capital. The people running these businesses had big ideas and bigger egos. That’s what investors wanted, so that’s what we gave them.

This was the investment world I grew up in. The average portfolio manager running hundreds of millions of dollars was in his late 20s. We set aside traditional ways of assessing value, because many of the tools we had learned didn’t work for companies with high growth and no earnings. We argued it was a new era for investing and the times had changed. We willingly changed with them. Our livelihoods were tied to the markets, and our advancement as analysts and portfolio managers was driven by our performance. We couldn’t afford to get left behind. So we bought the companies with the most exciting technologies. It didn’t matter that the economics of the businesses were questionable; we figured the management teams of these businesses would find a way to make a profit in the future, even if it wasn’t obvious how that might happen. It was a great strategy, and it worked well … until it didn’t.

After the Dot-com bubble burst, I learned my first hard-knock lesson about investing; I can’t pay any price for a company. Even when I really like what the company does, I have to determine what a share of the company should be worth and if it’s too expensive, I have to say, “No.” Certainly, this mindset has caused me to miss out on some investments over the years. I did not buy companies like Amazon early, or Tesla lately. But it also means I have avoided making some investment blunders. And I have found the experience of buying stabler businesses is better for investors in the long run; not only does it provide more consistent results, but it produces less anxiety.

Great companies are rarely “cheap.” To paraphrase Warren Buffett, “it’s better to buy a great company at a fair price than a fair company at a great price.” Some companies are cheap for good reason. We try to avoid those. Others, we have to be willing to pay a little more for. Costco (COST) is a good example. It may not be an exciting company, but Costco is a favorite among its patrons, the company’s customer service is great, and the products are terrific. Management of the company also has a sustainable plan for growth and they have delivered growth over time. And because of their membership program, they have good profitability and good cash flows, even through trying times like the 2020 pandemic, where supply chain disruptions and product shortages were the norm. Because Costco is exceptional in many regards, we might be willing to pay a little more for the company. But we can’t forget the lessons of the past; we still must be mindful of value.

~ Travis Raish, CFA

My daughter plays for her high school varsity soccer team. At about this time last year, they went to the state championship and won. It was an exciting time for the school and for the team, but my daughter couldn’t help but be a little disappointed. She was not a starter and in that championship game, she didn’t get to play. After that experience, my daughter resolved to do better. She trained in the off-season. She played for a club team in the fall. When high school soccer started this spring, she was ready and her efforts paid off. Not only did her team win a second straight state championship, but my daughter was a starter for the team and the coach honored her as the most improved player. To say this season was more satisfying for her is an understatement. She is already looking ahead to next season, working on a plan to improve again.

Improving at anything—whether it’s at sports or business—can be humbling. It’s hard enough to address the things we struggle with, but it’s even harder to take a critical eye to the things we think we do well. As investment managers, we challenge our assumptions. We know that owning quality companies is a strategy that has benefitted generations of investors. We also know that our process for finding quality companies has delivered solid results. But we deconstruct our strategy anyway, looking for ways to improve. In the past, this has led us to refine our approach. At one time, it was enough for us to own a company if they were one of the biggest in their industry, and the stock was trading at a good price. Today, we know it’s better for a company to also have a catalyst for growth, and we have ways of quantifying how profitable and financially stable they are. These metrics don’t help us make perfect decisions, but they help us make more informed decisions and that’s a benefit to our clients.

Just as we look for ways to improve our investment process, many of the companies we own also look for ways to improve what they do—in fact, that’s a hallmark of a quality business. In some cases, this means not just refining the business, but rethinking it altogether and dismantling it if necessary. Johnson & Johnson (JNJ) is a good example of this. For years, the company has operated two segments; a healthcare business that produces pharmaceuticals and medical devices, and a consumer business that produces personal and baby care products. While both segments are strong, management has decided to spin off the consumer business as a separate company. Johnson & Johnson, the medical company, will still be a world class developer of pharmaceuticals and medical devices. The new company, Kenvue (KVUE), will be a top competitor to other consumer product companies like Procter & Gamble (PG). And each company will be able to focus on what they do best, a change management believes will be an improvement for shareholders.

My daughter improved her soccer skills to benefit her team. We improve our investment process to benefit our clients. Johnson & Johnson is improving their operations to benefit shareholders. None of these things would be possible without the desire to achieve something better, a little humility and a willingness to work and change if necessary. But often, the results are worth the effort.

~ Travis Raish, CFA

As someone who lacks patience, playing chess is a great exercise. The game forces me to look forward several moves, trying to imagine what my opponent will do. I’ll craft a complicated trap that unfolds over time—as often as not, the plan and the trap will change as we trade pieces. But as long as I continue to evaluate my options and stay focused on my goal, I have a chance that things will work out to my advantage.

Investing is similar. We can use all the research and forethought we have, and we can have the best processes and strategy in place. But sometimes, the unexpected happens. Just like an opponent in chess might make a move I didn’t consider, causing me to reevaluate what I am doing, things change in the markets and we have to consider the impact of that new information on our existing investments. Sometimes our plans will change because of this new information, but being patient and letting things unfold naturally is often the better course.

This is essentially what happened with Nvidia. If you are unfamiliar with the company, they are the premier global manufacturer of graphics processors, and their semiconductor chipsets are found in the fastest computers running the most powerful applications. Years ago, we bought the company because of the quality of their products, and because they were involved in several emerging technologies.

Last year, the company had a bit of a setback. As cryptocurrencies declined, so did Nvidia’s stock, because their processors are used by cryptocurrency miners. This was particularly frustrating for us because we didn’t buy the company for its connection to crypto. And just like I have had to consider sacrificing a good piece in chess, hoping it’ll improve my overall position on the board, we gave thought to selling this good company because of the negative sentiment around crypto, hoping it might improve the overall portfolio.

I’m glad we were patient with the company. As it happens, Nvidia’s chipsets are also favored in computers running artificial intelligence (AI). As that segment of the technology marketplace has taken off this year, so has Nvidia’s stock returned to favor among investors. This isn’t to say that all of our decisions work out this way or this well. We can’t control the markets and sometimes things don’t work out the way we expect them to. But as long as we focus on the things that matter—buying companies with sustainable competitive advantages—and then have the patience to allow our companies to develop through tough situations, we are in the best position to have things work out to our advantage.

~ Steve Davenport, CFA

The big news in the past week has been the collapse of two banks. But Silicon Valley Bank and Signature Bank are not your friendly neighborhood lending institutions. Both take risks by loaning money to high-risk businesses, like early stage tech startups, and they attract very different depositors and investors as a result.

Of course, as news broke that the Fed was going to step in to protect investors from both banks, investors drew comparisons to the credit crisis fifteen years ago. But the environment then was very different from the environment today. Following a stock market meltdown at the start of this millennium, investors rediscovered real estate at a time when lending standards were lax. Stories abound of investors borrowing money for an investment property using little but a wink and a smile to secure their loan. Rightfully, the credit market collapsed under the weight of big bank stupidity and greed, and the effect rippled through the entire industry, affecting every community, because even some of the smallest and most well-run banks had exposure to similar low-quality loans.

It’s difficult to tell what other banks might be affected by the same challenges as Silicon Valley Bank and Signature Bank, but the number of banks is likely only a fraction of the industry. It’s important to remember that news travels fast and it is quickly absorbed by millions of people around the world. Investors react quickly and dramatically to news, especially when the news is bad or fear-inducing. That also means they overreact. What we see in the markets today are emotionally charged decisions being made by fearful individuals. Unfortunately, these things happen frequently. Fortunately, they rarely amount to much and they often translate into wonderful buying opportunities.

For us, it’s worth watching and monitoring what happens with the Fed, interest rates, inflation, and the banking industry, especially as it relates to some of the more aggressively positioned lenders. But the banks we own tend to be profitable, have good cash flows, and have diverse offerings so that even if one area of their business isn’t working as well, they have others to pick up the pace.

As we start to see the daffodils in bloom, we are reminded that spring is on the way. Before we are overcome with blooms and pollen, I was thinking about how we can enjoy the trees during the winter months. The redbud tree in my yard is a Forest Pansy, which is unique for its burgundy leaves and its shorter height.

All redbuds are amazing for the brilliant flowers which signal spring has arrived. When I look at the branches in winter, I am struck by the path of the branches reaching for the sun. Like all trees, they want the sun to help with photosynthesis and to create energy for growth. Most tree branches are fairly straight, while some take a more curved path. Redbud branches have a zig-zag pattern to get where they are going.

As I sit here trying to determine where the economy and markets are headed, I am struck by the simple linear or curved path that most people assume for the future. The line into the future may look straight when we take a 10-year to 20-year horizon, but in reality, there are many twists and turns on the way.

We are living during a complicated time for technology, the environment and politics. These elements contribute to (or detract from) the path and to our eventual outcomes in our lives. There are several concerns on our radar:

1. Recession in the next 12 months
2. Inflation in our goods and services
3. Ongoing conflict in Ukraine
4. Uncertain relationship with China

All these items may bring some rain on our parade, but we have seen them before and we can navigate them with due diligence. We strive for value, quality and balance in our portfolios, so there are always choices to be made.

How we feel about our path can also affect the journey. When I look closely at the redbud, I see a disjointed development of the branches and flowers. When looking from afar at the tree filled with flowers, the underlying branch are hidden, and I am overcome by the colors.

I think the jagged path is a much better way to anticipate the path forward for markets and the economy. Like the redbud branches, they grow in one direction, but adjust frequently. It is still moving in an upward direction, but slight changes help it to find the sun. We are all on a path towards some end goals, but the turns and changes are to be expected. Expecting a linear or smooth path is very comforting, but ultimately there are bumps and turns on the road. It may be better to enjoy the straight sections of progress as the exception versus the rule.

The recent frost has also hurt some of the shrubs, but good roots, healthy trimming and fertilizer can help the plants to recover. Our economy is similar. We go through difficult times, but we adapt and are better off for the challenges. Let’s change our expectations and celebrate the blooms on every branch.

~ Stephen Davenport, CFA