“Know what you own, and know why you own it.”
- Peter Lynch, former Manager of the Fidelity Magellan Fund
Happy Monday,
The first half of 2024 was very good to U.S. public equity investors, with the S&P 500 up 14.5% for that period. Meanwhile, at PointFour Capital, our public equity portfolio gained 15.4% in the first half of 2024.
We attribute our positive performance, compared to the S&P, to our positions in several large-cap tech stocks as well as artificial intelligence (AI) related stocks. In addition, we have been slowly rotating into lower-valuation industrial / banking / energy stocks which we think will be helpful in 2H 2024. We have lifted our 2024 year-end target for the S&P 500 to 5,400–5,600, which implies a continued slow rotation into lower-valuation stocks.
As we look forward to the second half of 2024, the first order of business will be second-quarter earnings reports, and there are several unanswered questions.
The bulls will argue that forward 12-month earnings-per-share estimate revisions have been strong, which should be positive for stock prices. The bears will argue that top-down macro reports have largely missed expectations, which foreshadows a period of earnings disappointment and negative guidance. Moreover, valuations are becoming stretched, which will be a headwind for some individual stocks.
Let's start with the good news. As we look ahead to the second-quarter earnings season, FactSet reported that S&P 500 forward 12-month EPS revisions are strongly positive; a bullish sign of positive fundamental momentum. On a bottom-up basis, Wall Street analysts are expecting above-average EPS growth of 11.2% for 2024 and 12.7% for 2025.
On the other hand, behind a supposedly strong and resilient single U.S. economy, there are really two broad truths: One where those at the top spend like there is no tomorrow and one where those at the bottom struggle to make it through today.
Consumer-driven companies have responded by prioritizing a focus on volume growth by lowering prices. McDonald's (MCD) has famously brought back its $5 menu, along with several of its competitors. Costco and TJX, both off-price retailers who offer high-quality products at discount prices, have both been richly rewarded in 2024 as consumers have flocked to their stores and their stock prices have risen.
I interpret these conditions as the characteristics of a midcycle expansion. Fundamental momentum, in the form of EPS expectations, drives the short-term trend. Valuation, which matters in the long term but has little effect in the short term, tells you how far you could fall. As long as momentum is positive, U.S. stocks can continue to rise.
Here at PointFour Capital, we are adept at seeing the big world-picture since we have been at this for decades, thus we avoided the 20% meltdown in 2022 and beat the S&P 500 two-year (2022 & 2023) performance by 14%. In 2024, we continue to beat the S&P 500 performance while at the same time reducing overall risk by hedging our portfolio to protect against the slow rotation to lower valuation stocks.
We achieved our 2022 - 2024 performance by predicting early on that we would eventually return to a more “value-based investment thesis.” In addition, we astutely recognize the once-in-a-lifetime investment thesis in AI and identified several main participants – NVIDIA, Broadcom, Microsoft, Google, Meta, and Amazon.
We are here for the long-term and making a profit and avoiding the latest fads means something to us. We do not see AI as a fad of any kind, instead, we see it as a fundamental technology shift that will alter the world as we know it over the next decade.
In addition, we also continue to look at opportunities in the commercial real estate market. The meltdown in this segment has been occurring in slow motion as defaults increase, especially in the “B” and “C” class office sub-segment. Our strategy is to take advantage of the dislocation of prices today in growth markets, like Atlanta, where we believe there will be a substantial inventory shortage in the next 5-10 years.
Remember that every significant market shift usually involves an over-correction, so we look to take advantage of short-term corrections and continue having a great 2024 and beyond!
Thanks again for your consideration, ideas, and trust. Have a great July 2024!
Best,
Vincent M. Oddo
Co-Founder & Managing Partner
PointFour Capital, LLC