1Q 2017 Quarterly Letter – The Trump Rally Continues

The S&P 500 and Russell 2000 Indices gained 6.1% and 2.5% respectively in the first quarter of 2017, continuing the upward momentum from last year.  Though President Trump’s flurry of executive orders, Congress’s failure to repeal and replace Obamacare, the Fed’s third interest rate hike, and the recent U.S. military strike in Syria caused uncertainty throughout the quarter, the equity markets marched higher.  Some pundits have called the post-election market surge the “Trump Rally,” attributing the recent market gains to his pro-growth agenda.  Many of our clients (particularly those who are not Trump fans) are asking: “Is the recent market rally warranted?  Can Trump really be good for the market?”

We think the recent market strength has very little to do with Trump and more to do with the continued global economic recovery and relative valuation of stocks compared to fixed income.  Consumer confidence and business optimism surveys recently hit 16-year highs and international growth continues to improve.  Even though the Federal Reserve Board has indicated its expectations for short-term interest rates to revert back up toward 3% over the next few years, markets are skeptical and 10-year U.S. Treasury bonds yield just 2.3%.  With such low potential returns from the fixed income market, U.S. stocks appear more attractive on a long-term basis given their net payout yield of 4% (dividends plus net stock buybacks) plus potential growth. 

While attractive relative valuations to bonds and positive momentum bode well for the market over the near term, we believe some caution is warranted.  Absolute stock valuations are at historically high levels, investor sentiment remains overly optimistic, and insider selling levels remain elevated.  All of these factors have historically acted as headwinds and could imply modest future market returns.  Fortunately, we feel we are still able to find good individual investment opportunities that offer attractive prospective returns while minimizing risk.      

What matters most for our client’s portfolios is our ability to find 30-40 investment ideas that meet our strict criteria of having exceptional management, low debt levels, durable competitive advantages, and trade at a price that we think offers an attractive return.  If we can do this, we feel our clients’ portfolios can perform well even if the broader markets face challenges.    

Last month, David and I went to the Seaport Global Industrial Conference in Miami and each sat down with the management team of fifteen different companies over two days.  We interviewed management teams on their management culture, incentives, competitive advantages, market outlook, balance sheet, and many other factors.  We were struck by how outstanding many these companies were in their respective markets.  We met with the country’s largest maker of hardhats, snow plows, aerial platforms, auto seats, wood flooring, and commercial kitchen equipment.  In many cases, these companies met all of our criteria except for price, so they will be added to our bench list.  We will follow them and wait for the right opportunity to buy when the risk/reward is stacked heavily in our favor.    

We remain fully invested in a portfolio of securities that meet our criteria of outstanding management, low debt levels, niche competitive positions, and trade at low valuation levels.  We remain optimistic that such a portfolio gives us the best chance to continue to achieve superior returns in the future.  

In firm related news, I’m thrilled to announce that we have recently hired Matt Lederman as our new Director of Business Development & Investor Relations. His primary responsibility will be to develop new business opportunities in addition to managing investor relationships. Prior to joining Eidelman Virant, Matt was responsible for marketing and consultant relations at New York-based Pinnacle Asset Management. Prior to Pinnacle, Matt held various sales and marketing positions with Alternative Access Capital, Bank of America, and Merrill Lynch. Matt received his B.S. from Vanderbilt University and his M.B.A. from Washington University in St. Louis.  We look forward to introducing Matt to all of our current and prospective clients.

1Q 2017 Quarterly Letter

This post is for informational purposes only and does not constitute a complete description of our investment advisory services. This post is in no way a recommendation of any security or a solicitation or offer to sell investment advisory services. This newsletter should not be construed as advice to buy or sell any particular security. This post is not definitive investment advice and should not be relied on as such. It does not take into account any investors’ particular investment objectives, tax status, or investment horizon. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Any forward-looking statements speak only as of the date they are made, and Eidelman Virant Capital assumes no duty to and does not undertake to update forward-looking statements. Certain investments mentioned in this post may not have been held by clients of, or recommended by, Eidelman Virant Capital.   Past performance is not indicative of future results.