A Shift to Value

 
Asset Management, Companies and Industries, Investment Themes, The Economy April 19, 2022

A Shift to Value

As inflation started to build a head of steam last year, we decided to build up exposure to gold by purchasing positions in senior gold miners. Last quarter, we initiated a position in Kirkland Lake, which recently merged with Agnico Eagle Mines (tkr: AEM) and assumed the name Agnico Eagle Mines. At the beginning of 2022, to further our exposure to gold amidst high inflation and a murky macroeconomic climate, we purchased a position in Newmont (tkr: NEM), the world’s largest gold miner with mining operations worldwide.

Prior to Russia’s invasion of Ukraine, we added to our position in oil major Exxon Mobil (tkr: XOM), a value-oriented stock with a healthy dividend and low valuation. Exxon has a superior dividend coverage level relative to peers, indicating that the dividend is safe, even if oil were to drop to $50 per barrel, making it attractive amidst oil price volatility.

In the technology sector, we added to our position in Microsoft (tkr: MSFT) as it reached a one-year low based on its  forward price-to-earnings valuation. Microsoft has a strong balance sheet and superior pricing power as its products are vital for businesses and consumers alike. Its cloud offering Azure is gaining ground on rival Amazon Web Services (AWS), and the company is well positioned to benefit from a digital transformation.

We trimmed our significant overweight in Disney (tkr: DIS) given its high valuation and a more competitive landscape in the streaming space as the market becomes more saturated. This challenging operating environment could extend Disney+’s path to profitability beyond management’s expectations of 2024. Additionally, the unpredictable surges in COVID-19 cases worldwide clouds the outlook for theme parks as some countries shut down again due to new variants.

We trimmed our position in Costco (tkr: COST) for several reasons:  it was a large overweight in our portfolio relative to the S&P 500, it carries a high valuation relative to peers, and it may be challenged by tough comparable earnings metrics. Costco remains a core holding in our portfolio as it garners revenue from both purchases of consumer staples and discretionary spending.

Chewy (tkr: CHWY), an online retailer of pet supplies, was one of the “pandemic winners” that outperformed due to the rise of pet adoptions and acceleration in ecommerce throughout the pandemic. However, the stock has been extremely volatile and will likely be significantly challenged by higher labor and supply costs as well as higher interest rates. Chewy lacks the resiliency of a more established company, and so we decided to sell out of our position.

In the real estate sector, we sold our position in Ventas (tkr: VTR) due to concerns over rising labor costs, particularly in their Senior Housing Operating Portfolio. Skilled nursing and senior care are not seen as a particularly attractive segments of nursing as the pay is typically lower and the work itself is unappealing to many. Ventas has seen significantly higher instances of contract laborers who receive 2-3x the amount of full-time employees. As labor comprises nearly 60% of operating expenses in that segment, this could substantially impact profitability. Additionally, the company is mandated to adhere to nurse staffing ratio rules which dictate how many patients each nurse can care for, limiting potential revenue.

 

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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