Not only was February the 2nd hottest February on record, but the market that month clocked a +3.97% return on top of January’s +1.90% gain. March was up only +0.12%, but the Q ended with the S&P 500 posting a +6.07% total return. Tech led with a +12.2% rise led by chip makers and the optimism that potential cuts to corporate taxes would give U.S. companies extra spending money to upgrade their technology. Consumer discretionary and healthcare sectors were both up +8.0%. On the downside, energy continued it multi-year seesaw. As oil prices climb, new producers (shale) begin pumping, and oil prices then again decline. The energy sector retreated -7.3% in the Q.
We are still cautious on the market, willing to make individual purchases (see below), but not willing to go all in. It is true that the earnings picture is improving somewhat mostly by way of a rebound in extremely depressed energy profits. Yet, the Fed has reaffirmed its goal of three rate hikes this year (the first was on March 15). Markets generally do not like increasing rates as the higher cost of capital constrains growth and fixed income investments become relatively more attractive. Further, Trump’s pro-business goals still remain goals and are not yet accomplishments. Valuation metrics we track (albeit better at the long term than the short term) still indicate a fully priced market.
In the Q, Portola was our best performer, up +75%. Recall that this is the drug company developing a fast acting, reversal agent for blood thinners. Portola’s other drug, an actual blood thinner (not antidote) was approved and appears to have a better side effect profile than those thinners currently on the market. Interest rates did a round trip during the Q – up and then back down by March 31. Many of our interest rate sensitive securities had returns in the high single digits. Our energy holdings did not escape the overall retreat and were down in the high single digits.
Our only significant purchase was a pet therapeutics company focused on dogs and cats. The firm had three drugs approved in late 2016, but saw its stock price decline when the Center for Veterinary Medicine delayed the rollout of one of the three. This was due to the company changing drug manufacturers and the subsequent requirement for additional documentation. Sales from this drug will now be delayed until late 2017. We like investing in animal drug companies: the animal population is growing, animal drug pricing should fly under the radar should Washington decide to take action on drug pricing, and there have been recent acquisitions of pet health care companies.
Gold Leaf is an independent Registered Investment Advisor that buys stocks/bonds in cash positive companies with sustainable competitive advantages. As an independent firm, Gold Leaf provides objective investment management. Our goal is to protect client assets on the downside while participating in most of the market’s upside.
April 1, 2017 Paul F. Rodgers, CFA
Gold Leaf does not provide legal, accounting, or tax advice. Please consult your personal lawyer or accountant.