Month: February 2021

#researchtrades selling PEP / buying HLT

We are selling Pepsi (PEP) out of Focused Equity. Partial proceeds to go into HLT (1.5%) and remaining funds into IVV.

 

The initial Pepsi buy thesis was:

    • Global growth opportunity with about 40% of profits coming from outside the US. CSD is only 25% of sales (and Pepsi brand only 12%)
    • Strong market share in high growth emerging markets where there is low penetration and rising per capita consumption
    • Resilient snack business provides pricing power and visibility to future cash flows (more than half of sales are from snacks not beverages). CSD is only 25% of sales (and Pepsi brand only 12%)
    • Several Great brands driving global growth: Frito Lay, Quaker, Gatorade
    • Strong balance sheet and cash flows support a solid dividend yield and share buyback program

 

Where our opinion changed: while we don’t think there is any material problems with their business, there are multiple data points that lead us to think Pepsi could continue to underperform this year:

    • Due to covid, snacking on the go and soft drinks consumption on-premise has been impacted, which we think could continue post-covid due to persisting adoption of working from home. A reminder that individually/on-the-go snacks and beverages are higher margin items – we could see margins being challenged this year.
    • Free Cash Flows expected flat due to reinvestments in the company (possibly over next 2 years) – not in consensus numbers
    • Leverage has increased in the last four years, which calls for debt reduction instead of share repurchase
    • Expectation for 2021 is high with almost 7% top line growth expected & higher FCF
    • Pepsi’s valuation is not attractive: low FCF yield, forward P/E is above average (although less so since the recent sell-off) but we see additional risks from high sell-side expectations

 

 BUY thesis on HLT:

    • Strong moat driven by network effect of leading hotel brand, global scale and loyalty membership
    • Asset-light, fee-based model leads to capital efficient growth which should drive valuation multiple over time.
    • Pipeline growth supported by superior economics of brand affiliation and a fragmented and underpenetrated global hotel industry.
    • Margin expansion as cost cutting from pandemic remains post recovery.
    • Capital allocation: improving free cash flow production should be returned to shareholders through dividends and buybacks.
    • Post-pandemic positioning:  with pipeline growth and margin expansion, EBITDA will recover much faster than RevPAR
    • Early signs of travel improvement with vaccine rollout. Pent-up demand in leisure, corporate and group travel should continue to drive improving trends.

 

 

 

Home Depot Q4 Earnings

Current Price: $267                     Target Price: $324

Position size: 2%                          Performance since inception: +36%

 

 

Key Takeaways:

·        HD reported strong Q4 results, beating estimates. Stock was down on guidance. No formal guidance for 2021 given uncertain environment. If demand level stays where it is currently at, they would see flat to slightly positive SSS.  They lap difficult compares from last year. Improvement w/ Pros should help offset weakness from DIY as trends shift w/ a decrease in social distancing.

·        Incredibly strong SSS continues for now (overall SSS +24.5%; US SSS +25%). They continue to take share in home improvement with sales that were well ahead of expectations.

·        Omni-channel strategy continues to shine. E-Commerce sales were mid-teens % of sales in the quarter, up+83% YoY, with 55% of online sales picked up in store.

·       Announced 10% dividend increase

·        Mgmt. quote from call…” At the beginning of the year, I would have never thought it possible for the business to grow over $21 billion in 2020. For context, it took us 19 years as a company to achieve the first $20 billion in total sales and we outgrew that in this year alone.”

 

 

Additional Highlights:

·     While HD will be lapping difficult comparisons this coming year, multiple tailwinds still persist. Nesting effects from Covid have been a tailwind – continued WFH/hybrid work environments should continue to support “nesting” to a degree despite a vaccine. Additionally, strong housing fundamentals should continue to be supportive to sales – including higher household formation w/ suburban migration and an aging housing stock. Also, record low inventory and low interest rates support pricing which supports investment in the home. Finally, they should see tailwinds w/ pent-up demand from Pros as social distancing caused a delay in inside projects. 

·      Omni-channel model continues to shine – E-commerce sales were +80%. Omni-channel strategy differentiates them from peers helping to drive share gains. Express car and van delivery service that covers over 70% of the U.S. population.

·      Margin expansion potential – elevated opex due to Covid will abate, but an offsetting factor is that GM will see a hit from higher transportation costs.  During fiscal 2020, they  invested ~$2 billion on enhanced compensation and benefits for associates – they made about half of those increases permanent. In Q4 enhanced compensation caused 105bps deleverage while gross margins were 30bps lower on pressure from higher mix of lumber, shrink and transportation costs.  

·       SSS Details:

o   Broad-based strength across the store and all geographies. All of top 40 markets posted double-digit comps, while Canada posted comps above the company average, and Mexico posted double-digit comps in local currency.

o   SSS above 20% in the US for 36 of the last 39 weeks

o   All merchandising categories saw double-digit growth. Lumber & indoor garden were the strongest.

o    Saw strong double-digit growth from both the Pro and DIY customers. Large pro customers seeing an increase in backlog.

o   Both ticket and transaction were up double digits. Inflation from core commodity categories positively impacted average ticket growth by 220bps.

o   Big ticket (over $1000) transactions were +23%..similar to last quarter. Strength in appliances, vinyl plank flooring and vanities.

 

·        Capital allocation: resuming share repurchases this quarter and dividend increased by 10%. Remain committed to growing over time.

·        Valuation: Strong balance sheet, benefiting from strong housing trends but also has defensive qualities and reasonable valuation, trading at ~4.9% forward FCF yield.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

$HD.US

[tag HD]

[category earnings]

 

 

Medtronic Q3 FY21 earnings summary

Key Takeaways:

 

Current Price: $118                             Price Target: $124 (NEW, increased from $121)   

Position Size: 2.72%                           TTM Performance: +2.2%

 

  • 3Q sales (ending January 2021) declined 1% due to December and January resurgence of Covid cases, impacting non-essential surgeries. This wave of covid cases was the worst they have experienced since the beginning of the health crisis
  • In terms of geographies, emerging markets were up slightly (+0.8%) with growth in Latin America, Southeast Asia and China (up mid-single-digits), while the US declined 2% and Western Europe down LSD
    • Continued market share gains from Boston Scientific exiting the TAVR market, although sales were down MSD (VS flat for competitor EW)
    • Ventilator sales high (triple from last year) but softening somewhat – respiratory & patient monitoring grew in the mid-30%
    • Pumps in Diabetes was a key driver to growth – segment grew 1%, a sign this business might finally be turning the corner
    • Sales of capital equipment for elective surgeries were at a record level this past quarter, which the CEO considers a “really strong leading indicator that hospitals are ramping up in the US for a rapid recovery”
    • CEO quotes:
      • “we’re seeing it in many hospitals, depends where you are, we’re seeing a snapback” of elective surgeries.
      • “when we couldn’t meet with doctors, I was amazed at how digital [technology] came to the rescue”
  • 430 bps sequential improvement in operating margin despite covid impact in December and January, thanks to better control of SG&A expenses
  • Capital allocation: continues their tuck-in acquisitions with RIST Neurovascular (the 8th one since January 2020 – for a total value of $1.7B) – and we should expect more to come
  • Still no guidance for the year, but expect Q4 to improve throughout the quarter, with organic sales up 30-34%, and sequential margin improvement thanks to top line growth
  • Overall we think MDT is on track to accelerate its growth going forward as we come out of the pandemic (thanks to market share gains &  new launches), despite the delays caused by covid.

 

 

 

MDT Thesis:

  • Stands to benefit from secular trends (1) increased utilization from Obamacare (2) developed populations age
  • Strong balance sheet and cash flows. Increased access to non-cash should allow MDT to meaningfully increase their dividend
  • 6% normalized Real Cash yield provides solid total return profile over next 2-3 years
  • Ownership interest aligned. Management incentivized to maximize shareholder returns – 14% 10yr average ROIC

Category: Equity Earnings

 

Tag: MDT

 

$MDT.US

 

Zoetis 4Q2020 earnings summary

Key Takeaways:

 

   

Share price: $168                     Target Price: $182  

Position size: 2.08%                TTM return: +15%

 

Overall Zoetis released another remarkable quarter with companion sales +25%. The management team provided an initial 2021 outlook that is mostly positive, with sales expected in the 9-11% range. Margins should not expand as much as we’ve been used to as the management team wants to invest in its diagnostics business as well as marketing. This most likely explains the lack of reaction in the shares on earnings day. Even with today’s valuation, we remain impressed with the growth story and continue to see upside as new drugs come to market.

 

Revenue growth of 9% (ex-FX): 2% from price, 7% from volume (4% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 1% from other in-line products)

o    For 2020, revenue grew 9%, and similar to 4Q, price added 2% and volume 7% (3% from new products, 3% from key dermatology products, 1% from acquisitions)

o    Companion animal grew 25% in 4Q

o    Simparica Trio launch was slow initially in clinics with covid restrictions, but finished the year with goals achieved

o    Covid created a difficult environment for livestock down 5% – but the company believes consumption patterns will return to normal in 2021, bringing this segment back to growth in the low single digits, while long term it will return to 4-6% growth y/y

o    Diagnostics portfolio grew thanks to a recovery in vet visits

Margin expansion was lower than prior years (+20bps for the year vs. +200bps)

CEO quotes:

o    “Positive pet care trends during the pandemic based on increased adoption and people spending more time with their pets should continue driving market growth in the near-term. Date in the US shows visits to veterinary clinics have rebounded and the average revenue per visit has continued to increase”

o    “We’re also hopeful that you will see an increase in dine out which will send signal to the industry to expand herds”

 

 

Guidance for 2021:

Revenue growth of +9% to +11%, driven by continued launch of Simparica Trio and other parasiticides, dermatology portfolio growth, and diagnostics

  • Livestock growth in the low-single-digits, growing in line with the market. Their leading anti-infective product DRAXXIN is facing generic competition. Recovery continues form the African Swine Flu in China
  • Companion animal: growth in the mid-single-digits, growing faster than the market
  • Launch of the first monoclonal antibody for osteoarthritis pain in dogs (Librela) and cats (Solensia) in Europe in 1H21, followed by the US in 2022 – approval by the FDA seems unlikely in 2H 2021 due to delays and challenges affecting the FDA, related to Covid.

Flat gross margins as the company is investing behind reference labs and generic competition on Draxxin (and price impact on it). It is possible that near term ZTS does not see high margin expansion as it has in the past but we don’t expect a contraction

 

Zoetis investment thesis:

·         ·         Attractive industry profile: mid-single-digit growth rate, little generic threat, cash payers, pet sub-sector is very fragmented

·         ·         ZTS is a leading diversified animal pharma company that continues to innovate to fulfill unmet animal needs

·         ·         ZTS is growing above the industry rate and has proven resilient throughout economic cycle

·         ·         Experienced management team has proven successful in increasing revenue and margins since the IPO in 2013

·         ·         Good capital allocation strategy: M&A and capex spending have lifted sales and improved profitability

 

 

S&P Global’s Q4 Results

On 2/9, S&P Global announced impressive Q4 earnings with EPS up 23% for 2020.  Key takeaways are: 

  • Revenue up 11% to $7.4b with organic revenue growth up 10% 
  • All four businesses grew revenue and operating profit 
  • Generated $3.3b in free cash flow 
  • Returned $1.8b to shareholders 

 

Current Price: $337.90                    Price Target: $410 

Position Size:   2.5%                         Performance since add on 2/3/21: +4.2%  

 

2020 Highlights: 

  • Ratings  
    • Revenue grew 16% with organic revenue 15% 
    • Operating profit +25% 
    • Margins increased 460 bps to 62.4% 
  • Market Intelligence 
    • Revenue grew 8% with organic revenue 7% 
    • Operating profit +9% 
    • Margins increased 30 bps to 32.4% 
  • Platts  
    • Revenue grew 4% with organic revenue 4% 
    • Operating profit +8% 
    • Margins increased 230 bps to 54.7% 
  • S&P Dow Jones Indices 
    • Revenue grew 8% with organic revenue 8% 
    • Operating profit 7% 
    • Margins decreased 40 bps to 69.1% 

 

Growth initiatives 

  • Implementing ESG offerings across platform  
  • China analytic platform – 22 ratings in 2020 
  • Technology expertise – Kensho AI initiatives 
    • RiskGuage, ProSpread, Riskcasting Indices, Moonshot index, Kensho Scribe and many others combining data and analytics 
  • Merger with IHS Markit remains on track for closure in second half of 2021 

Capital allocation 

  • S&P returned $2.8b to shareholders in 2020.  Their stock dividend yields .79% and with stock buybacks has a shareholder yield 2.2% 
  • Given the pending merger of HIS Markit share repurchases are on hold.  Cash on balance sheet has grown from $2.8b to $4.1b, which bodes well for stock purchases in the second half of the year post merger. 

 

S&P Global Investment Thesis: 

  • S&P Global is a highly profitable company that has established businesses with deep moats in attractive industries 
  • S&P Global is focused on shareholders and returns 75% of free cash flow in dividends and share buybacks 
  • Over the past several years, S&P Global has demonstrated an enviable history of revenue growth and margin expansion 
  • With the merger of IHS Markit, S&P Global will combine many unique data sources, enhance data analytics capabilities, and broaden addressable markets. 


Please let me know if you have any questions.
Thanks,
John

SPGI.US

Black Knight 4Q20 Earnings

Current Price: $81           Price Target: $96

Position Size: 2.4%          TTM Performance: +9%

 

 

Key Takeaways: 

·       BKI reported a strong quarter and guided revenue and EBITDA in line w/ consensus. The stock is lower on weak EPS guidance – driven by higher depreciation, interest expense, and earnings on non-controlled interests.

·       Exceeded expectations on in both segments w/ higher origination volumes and continued improvement in data and analytics sales.

·       Lower foreclosures is a headwind: as they indicated last quarter, they are seeing lower foreclosure-related volumes in their Specialty Servicing software business due to the foreclosure moratorium. This will likely continue until 1H22 w/ the moratorium extending through Sept.

·       Data & Analytics strength (+16% YoY): Seeing continued improvement with cross-selling Data & Analytics (~15% of revenue), which could be a solid future growth driver for them.

 Additional Highlights:

·        Q4 Revenues were $342m, +14% (Optimal Blue added $32m) and adj. EPS was +11%.

·      Segment organic revenue guidance: Servicing software +mid-single-digits, origination software +low-double-digits, D&A +mid-single-digits puts total company +6%.

·       Their stake in D&B is now worth $1.3B. They invested just under $500m in their D&B stake ~1 year ago giving them a pre-tax unrealized gain of ~$800m.

·       Data analytics segment (~15% of revenue) revenues were up 16%. Driven by growth in their property data and portfolio analytics businesses.

o   EBITDA margin +310bps YoY.

o   Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals. They continue to see promising momentum in this business.

o   Current situation is highlighting their unique data sets and analytics. They are the only company with real-time visibility into the majority of active mortgage loans in the US. This is helping w/ loan origination despite social distancing. They’ve seen significant interest in and adoption of their expedite e-close and e-sign solutions as well as their loss mitigation solution since the beginning of the pandemic.

·        Software Solutions segment (~85% of revenue) up 14% YoY.

o   Within this segment servicing (~70% of revenue) was up 2% – new client loan growth helped offset 6% ($12M) foreclosure moratorium headwinds.

o   They continue to dominate first lien loans with leading share and are growing share in second lien loans. Market share for first mortgages is >60%.

o   Originations (~16% of total revs) made up of new loans and refi’s – revenues increased 56% as it was the first quarter that included the Optimal Blue acquisition. Lower rates help this business. Growth driven by higher refinanced volumes in their Exchange and e-Lending businesses.

  • Segment EBITDA margin down 180bps YoY.

 

Valuation:

·       Trading at ~3% FCF yield on 2021 –valuation is getting more expensive but supported by growth potential, strong ROIC with a recurring, predictable revenue model (>90% recurring revenue) and high FCF margins, which is aided by high incremental margins and capex which should taper as they grow.

·       Leverage ratio at 3.8x. Increased from <2x with recent acquisitions.

·       Capital allocation priorities include debt pay down, opportunistic share repurchases and acquisitions.

Thesis:

  • Black Knight is an industry leader with leading market share of the mortgage servicing industry. 
  • Stable business with >90% recurring revenues, long-term contracts and high switching costs.
  • BKI has high returns on capital and high cash flow margins.

 

.UA

[tag BKI}

[category earnings]

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$BKI.US

[category earnings]

[tag BKI]

 

 

CVS 4Q 2020 earnings summary

Key Takeaways:

Current Price: $72                            Price Target: $90

Position Size: 2.04%                        1-year Performance: +4%

 

CVS reported earnings this morning. Revenue grew 3.5% in Q4, and adjusted operating margin dropped 160bps due to Covid costs and decreased traffic in stores. Today, CVS is the largest community testing organization in the US for covid-19. Overall 4Q performance was as expected, although FY21 underwhelmed a bit on the EPS (no lift in guidance from prior commentaries) and cash-flow, with timing of some items pulled into 2020 numbers from 2021, while capex is expected to increase above historical levels. In 2020, full-year cash flow grew 23%, thanks to good performance, working capital improvements and timing of some cash transactions. Net debt/EBITDA is now at 4X, on track to achieve 3X target in 2022. We think CVS approach to healthcare as a diversified company provides opportunities to interacts with its customers in various parts of the system and gain market shares. This is a multi-year process though and patience is key to see meaningful results.

 Segments update:

·         Health Care Benefits: +9.6%, thanks to increased membership in government products. The segment’ s profits were impacted by the higher cost of COVID testing and treatment

      • Total medical members increased 2.2% y/y
      • Medical Benefit Ratio of 86.7% is higher y/y (meaning more of the premiums collected was used to pay for medical expenses – and less left for profits)

·         Pharmacy Services: -1.9% due to some client losses and continued price compression

·         PBM: 98% retention rate

·         Retail/LTC: +6.6% due to increased prescriptions, flu vaccines, Covid testing (worth $400M in Q4). Same-store-sales +5.3%, growth in prescriptions driven by increased adoption of patient care programs

FY 2021 guidance:

  • Q1 expected to be the lowest earnings of the year, affected by investments to advance vaccination program, and lower front store traffic due to weak flu season
  • Revenue growth between 3%-4.5% – strong growth in Medicare products, specialty pharmacy, brand drug inflation
  • Return to normalized medical costs and physicians visits through the year
  • Cost savings $900M to $1.1B
  • Adjusted EPS $7.39-$7.55 – +4% to +6% (consensus $7.50)
  • Capex $2.7B-$3B – higher than prior years as the company plans to invest more in technology and digital enhancements
  • CFO $12B-$12.5B
  • Continued Covid testing, but covid impact should be immaterial to EPS
  • Flat dividend and no buyback

 

Thesis on CVS

·         Market leader: largest pharmacy benefit manager (PBM) in the US. This gives CVS scale advantage and negotiating power with pharma companies to obtain better drug pricing discounts. Also the largest US pharmacy retailer, giving it more touch points with consumers/patients. Finally, market share leader in long-term care pharmacy sector thanks to its Omnicare acquisition.

·         Aetna acquisition makes it vertically integrated.

·         Stable and predictable top line and margin profile. CVS benefits from an ageing population in increasing needs of prescription drugs.

·         shareholder friendly, offering a 7% shareholder yield (5% share repurchase + 2.6% dividend yield)

 

$CVS.US

Category: earnings

tag: CVS

 

TIREX – Q4 2020 Commentary

TIAA-CREF Real Estate Fund Commentary – Q4 2020

Thesis

TIREX utilizes fundamental research to find properties in high barrier markets, with higher occupancy and rent growth. By focusing on quality companies and avoiding unnecessary risks, the fund obtains a strong track record that has outperformed the benchmark and REIT ETF over time. We continue to hold TIREX because of the team’s growth focus with asset concentrations in supply constrained markets. Lastly, TIREX was the lowest cost active manager screened, at 51bps.

 

[more]

 

Overview

In the fourth quarter of 2020, TIREX outperformed the benchmark (FTSE Nareit All Equity REITs Index) by 20bps, driven by strong stock selection in the rebounding sectors such as lodging, and underweight to wireless cell tower REITs. These contributors were partially offset by an underweight to hard-hit industries that saw a strong bounce back in the fourth quarter – mainly office and shopping center REITs.

 

Q4 2020 Summary

  • TIREX returned 8.35%, while the FTSE Nareit All Equity REITs Index returned 8.15%
  • Contributors
    • Allocation to AirBnB Inc. was the largest contributor
      • This position was shortly sold due to its immense valuation expansion
    • Underweight to Crown Castle International Corp.
    • Allocation to Simon Property Group, Inc.
  • Detractors
    • Not owning Medical Properties Trust Inc. was the largest detractor
    • Not owning Ryman Hospitality Properties Inc.
    • Underweight position to Weyerhaeuser Company

 

 

 

 

 

 

Optimistic Outlook

  • We continue to hold this fund and believe in our thesis due to the fund’s goal to obtain long-term alpha through capital appreciation and current income
  • By having a research-oriented investment process that focuses on cash flows and asset values we believe TIREX will continue to outperform its benchmark long-term
  • The managers are effective when it comes to understanding and preparing for changes to the REIT landscape and where long-term sustainable growth exists

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Category Mutual Fund Commentary]

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

WHGSX – Q4 2020 Commentary

Westwood SmallCap Fund Commentary – Q4 2020

Thesis

WHGSX is our only active manager in the small cap U.S. equity markets and applies a quality and value tilt to their investment strategy, holding between 60 and 80 companies. By utilizing bottom-up fundamentals and focusing on companies with strong balance sheets, high ROIC, and consistently high FCF yield, the fund generates alpha especially during market downturns. We continue to hold WHGSX because of the team’s ability to find cheap valued stocks in the small cap space enabling them to generate strong returns over the long run.

 

[more]

 

Overview

In the fourth quarter of 2020, WHGSX underperformed the benchmark (S&P 500 Index) by 531bps largely due to weak allocation and stock selection, and the success the “quality” factor during the pandemic-induced downturn. Specifically, industrials, consumer staples, consumer discretionary detracted from overall performance. As for the quality factor, this saw less of a rebound due to its resilience throughout 2020. Health Care on the other hand was a contributor to returns for the quarter.

 

Q4 2020 Summary

  • WHGSX returned 25.98%, while the S&P 500 Index returned 31.29%
  • Industrials – leading detractor
  • Consumer Staples – overweight detractor
  • Consumer Discretionary – detractor due to weak stock selection
    • Exposure to delivery-oriented restaurants and home building
  • Positions initiated
    • WIRE, HCSG, SFNC, JACK, DOOR
  • Positions sold
    • LSCC & PNM

 

 

 

 

 

Optimistic Outlook

  • We continue to hold this fund and believe in our thesis due to the value and quality tilt strategy that has a bottom-up, fundamental focus around ROIC, FCF yields, balance sheet metrics, and companies trading at a discount
  • Vaccine distribution will help reopening efforts in the later part of 2021, yet market volatility is expected to continue
  • The fund will continue to focus on quality companies that are trading at a relatively attractive valuation – strong return and cash generation

 

 

[Category Mutual Fund Commentary]

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

AFVZX – Q4 2020 Commentary

Applied Finance Select Fund Commentary – Q4 2020

Thesis

AFVZX is our only active manager in the large cap U.S. equity markets and applies a quality and value tilt to their investment strategy, holding roughly 50 companies. By utilizing DCF models, bottom-up fundamentals, and holding sector weights that are equivalent to their benchmark (S&P 500 Index), the fund generates alpha over time purely through stock selection. We continue to hold AFVZX because of the team’s ability to compare stocks across all sectors which enables them to generate strong returns over the long run.

 

[more]

 

Overview

In the fourth quarter of 2020, AFVZX outperformed the benchmark (S&P 500 Index) by 510bps largely due to strong allocation and stock selection in Consumer Discretionary, REITs, Financials, and Healthcare. 10 of the 11 sectors outperformed the index, while Energy was that only sector that underperformed and detracted from returns. The overall favoritism towards large cap stocks during 2020 greatly detracted from returns – the fund has large weights to smaller cap names compared to the index.

 

Q4 2020 Summary

  • AFVZX returned 17.25%, while the S&P 500 Index returned 12.15%
  • No changes to the fund during the quarter – ALXN has agreed to acquire AZN in December 2021 and management plans to replace this name prior to the acquisition
  • Top contributors
    • Consumer Discretionary – APTV & LKQ
    • REIT – HST
    • Financials – JPM & BAC
    • Health Care – CVS, MCK, SYK
  • Top detractors
    • Energy – CVX, COP, VLO
    • Health Care – TMO & DHR

 

 

 

 

Optimistic Outlook

  • We continue to hold this fund and believe in our thesis due to the fund’s ability to outperform the index over the long run through strong stock selection and maintaining a quality and value investment tilt
  • The team believes the market is richly valued and can see improvements in valuations
    • Faster than expected growth rate in economy
    • Higher than expected margin surprise for stocks
  • Weary of market growth and its continued rally with the abundance of stimulus that has been borrowed and rolled out
  • The continuation of the virus, vaccine distribution, and the implementation of Biden’s policies – especially on taxes and the “green” movement – could caused prolonged volatility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Category Mutual Fund Commentary]

 

 

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com