Busy Start to the New Year

 
Asset Management, Companies and Industries, Investment Themes, The Economy April 18, 2024

Busy Start to the New Year

Most of the adjustments made to our portfolio in the first quarter took place in the technology sector, including the addition of several companies. We bought a position in Salesforce (tkr: CRM), a cloud-based enterprise software which specializes in customer relationship management. Over the past year and a half, Salesforce has made significant changes to improve efficiency and focus on improving margins, primarily through substantial layoffs. The company eliminated over 10% of its workforce following a period of over hiring in the pandemic. As a result, Salesforce has emerged as a more efficient company poised to improve margins and boost growth. We also initiated a position in Adobe (tkr: ADBE), the leading provider of content creation software. Adobe offers diversified revenue streams and strong brand value. The company is highly profitable and cash flows are predictable due to its recurring revenue streams. Adobe boasts a strong position in growing markets, particularly in generative AI where it has already impressed users with new features integrated into its existing product lines. Additionally, we purchased a position in iShares Cybersecurity and Tech ETF (tkr: IHAK) to gain diversified exposure to a basket of cybersecurity companies given the uptick in cyberattacks over the past several years. Areas of cybersecurity include cloud security, network security, endpoint security, and consumer security products. Lastly, we trimmed our position in Apple (tkr: AAPL) given the significant regulatory overhangs which puts its Services segment, Apple’s growth driver, at substantial risk. Furthermore, the company continues to see a slowdown in iPhone and iPad demand particularly in China, its second largest market. The company also recently scrapped the Apple Car project which lacked direction for years despite the estimated $10 billion invested in the project. In addition, Apple seems to lack a clear AI strategy and is behind its peers in the race to offer AI solutions.

Outside of the technology sector, we trimmed our position in Diageo (tkr: DEO), a leading alcoholic beverages company in the consumer staples segment. Diageo continues to face macroeconomic headwinds across multiple regions which are expected to negatively impact the company’s performance over the next year. We still retain a small position as Diageo has a solid brand portfolio and vast geographic footprint. Given the recent weakness in consumer-packaged foods, we trimmed our position in General Mills (tkr: GIS), another consumer staples company. For the last few years, General Mills was able to offset declining volumes with price increases, but at this point, pricing actions have mostly been exhausted and General Mills will be unlikely to offset falling volumes at least through the end of 2024. In the financial sector, we added to our position in Arthur J. Gallagher (tkr: AJG), an insurance broker, following a pullback in the stock price as the market got ahead of itself pricing in aggressive rate cuts.

In our international allocation, we swapped out of a portion of our position in the Vanguard Emerging Markets ETF (tkr: VWO) in favor of the iShares Emerging Markets ex-China ETF (tkr: EMXC) given the current economic challenges in China. Geopolitical tensions, a real estate crisis, an uptick in onshoring and nearshoring, and unfavorable demographic issues present substantial headwinds to China that could inhibit growth in the region for years to come. We expect other emerging markets countries, including Vietnam, Indonesia, and Mexico, will benefit from the relocation of manufacturing facilities outside of China.

 

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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