Pursuing Quality and Resilience
Pursuing Quality and Resilience
AI hype has consumed the market, driving the S&P 500 up nearly 16% year-to-date as of the end of the second quarter. Though we have some exposure to AI, primarily through our overweight positions in Microsoft (tkr: MSFT) and Alphabet (tkr: GOOG) which were up 42% and 36% respectively over the same period, we remain committed to pursuing high quality companies that should hold up well in a more challenging macroeconomic environment.
We further diversified our consumer staples sector by adding Coca Cola (tkr: KO), the leading non-alcoholic beverage company. Coca Cola is one of the most recognizable brands in the world, awarding the company with strong pricing power and a whopping 46% market share in the carbonated soft drink market. As a result, the company boasts superior margins versus competitors. Coca-Cola was long seen as “recession proof” and has continued to grow its dividend for the past 61 years to its current dividend yield of 3%. In addition, the company could benefit from several growth drivers in the near-to-medium term such as China reopening, shift in spending from goods to services and opportunities within emerging markets.
In the industrials sector, we bought Emerson Electric (tkr: EMR), dubbed the “King of Automation” by Morningstar. Emerson has the industry’s largest installed base in the Americas. Emerson’s recent shift to become a pure-play automation company through the acquisition of Aspen Technologies and the sale of its climate business has resulted in a more efficient, focused, and profitable business. Throughout the pandemic, we saw supply chain disruptions and labor shortages which have prompted companies to rethink their supply chains. Emerson will be a huge beneficiary of this as companies move manufacturing onshore, manufacturing plants seek to automate more tasks, and sustainability and decarbonization efforts become more prominent. Its diversified end markets drive resiliency and lead to more stable results.
Lastly, we sold First Republic Bank (tkr: FRC) over concerns regarding the viability of the bank following the failure of Silicon Valley Bank. (See Something Broke for more information on the fall of Silicon Valley Bank). Mirroring one of the major issues with Silicon Valley Bank, FRC was particularly exposed to loan losses. While First Republic did report unrealized losses on investment securities like other banks, it did not report losses on outstanding loans (particularly mortgages) which comprised a large portion of its balance sheet. Depositors pulled their funds out of First Republic Bank as the company remained under the microscope with regulators ready to seize the bank at any moment. Shortly after our sale, the Federal Deposit Insurance Corporation (FDIC), a federal agency that insures deposits in US Banks, swiftly took over First Republic as it was placed into receivership and the majority of the assets were later sold to JP Morgan (tkr: JPM). Bank contagion fears have since eased and regulators are now introducing revised banking regulations to prevent further turmoil and bolster resilience within the banking system.
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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