Market Update March 13, 2020– Minimizing Distraction from Market Noise
Fears of a growing COVID-19 (Coronavirus) pandemic are causing anxiety levels to increase while stock prices decrease. Current market volatility is now approaching levels not seen since 2008 when the market wrestled with the global financial crisis. In 2008, it was a Wall Street problem that spilled over to Main Street. Today, it is a Main Street problem that is spilling over to Wall Street. With so much uncertainty creeping in on Wall Street, it is not always easy to take a step back and think about a disciplined approach to investing.
Our Investment Process Remains the Same, Regardless of the Market Environment
At Waycross Partners, we believe that successful investing is a balance between conviction and discipline. Conviction is achieved through our Key Factor Approach to fundamental analysis, which keeps us focused on only the most critical drivers to a company’s earnings. A disciplined approach to risk management is embedded within our investment process as we seek to understand, monitor, and balance both downside risk and upside potential.
This process is the foundation of both Waycross’s long only and long-short investment strategies. Put simply, we emphasize companies that are either leaders in their respective industries or are disrupting their industries through innovation on the long side, and seek to short stocks with weak Key Factors at questionable valuations. We believe this disciplined, focused process allows us to minimize distraction from the market noise that occurs when volatility is heightened.
Our Views on Select Sectors
Healthcare
Within the sector, we see opportunity in medical technology companies, which are significantly down. Many procedures employing med-tech devices can be deferred, but not cancelled. Investors are expecting a slowdown in device sales in the near term, but have not yet factored in the rebound in sales once previously deferred procedures are re-booked. Valuations are attractive relative to strong underlying growth rates.
Industrials
As the response to the Coronavirus pandemic results in slowing economic activity, many of the hardest hit companies have cyclical exposure to industrial activity. Many of these companies are well run, with strong balance sheets, and are trading at extremely low valuations. We look forward to an opportunity to buy excellent companies that will benefit from the rebound in activity that will occur as we grow out of the slowdown.
Energy
The energy sector selloff is unprecedented. The drop in demand from the Coronavirus-induced slowdown has been exacerbated by the price war between Russia and Saudi Arabia. If the price war continues for an extended time, U.S.-focused oil companies will struggle for survival, and the market is trying to price this probability. On a positive note, low energy prices will result in lower input costs for many transportation and other industrial companies that are energy intensive.
Consumer Staples
This sector appears to have the most potential to be the big winner of the Coronavirus pandemic as investors flock to defensive stocks.
Communications
The greatest exposure this sector has to COVID-19 is in the Internet Media sub-sector. This sub-sector is the most exposed due to potential digital advertising cut backs in the event of a recession. However, this sector overall offers the most potential insulation from COVID-19 due to the limited effect a quarantine will have on this sector’s earnings. While mega cap stocks in the sector offer the greatest liquidity in a market drawdown and are exposed to a dry up in digital advertising spending, we believe they have solid fundamentals and now trade at attractive valuations.
Financials
Market interest rates have declined sharply as investors have grown increasingly concerned that the spread of Coronavirus could cause a global recession this year. Because lower interest rates imply lower profits for banks, the banking sector has seen a significant price decline year to date, bringing valuations to the low end of their historical range. Bank balance sheets, however, are the strongest they have been in over a decade and are well positioned for any potential macro slowdown.
While equity markets have been put to the test over the past four weeks by Coronavirus and an oil price war, we still believe the best course for investors is to keep calm and remain invested – especially in strategies designed to protect against downside risk. While some stocks will experience long-term losses, others stand to benefit in the near term from falling energy prices, interest rates and a decrease in mobility. There will be many winners and losers to choose from on both the long and the short side. We will continue to monitor our portfolios and take advantage of opportunities as they present themselves.
Disclaimer
Waycross Partners, LLC (“Waycross”) is an independent, privately owned investment management firm registered with its principle place of business in Louisville, Kentucky. Waycross three distinct investment strategies to our clients, which are made up of institutional and high net worth individuals.
This material is for informational purposes only and is neither an offer nor solicitation to invest. Please read all offering memorandum, ADVs, and other risk disclosures before investing.
Any projections, market outlooks or estimates in this document are forward looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect the returns or performance . Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of Waycross Partners. The information in this material is only current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only Waycross Partners’ current opinions, which are subject to change and which Waycross Partners does not undertake to update.
