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OUR MISSION

To deploy client capital in a way best suited to meet the client's financial needs and then constantly keep watch over that capital to respond to the opportunities and pitfalls inherent in today's financial markets.

Archive for the ‘Market Commentary’ Category

Summer 2017 Investment Update — Staying Grounded

Posted by on July 21, 2017

Staying grounded as an investor is vital to long term success, and is as important when financial markets are making new highs as when crisis envelopes the economy.  As we continue to experience a rapidly increasing market, it is helpful to consider what staying grounded actually means.  Clearly, one aspect is to not get carried away with riskiness when risk is being so lavishly rewarded. Margin loans are a recipe for disaster, as is a kind of heedless momentum investing, consisting of buying what has gone up the most for no other reason than the hope that such stocks will continue to rise.   There is also a tendency, which must be fought, to lose patience with investments such as bonds or real estate that may not be rising at all and are mathematically dragging down the overall performance of an investment portfolio.  In many ways these are the lessons of the 2000 tech market crash, which left aggressive investors with huge paper losses from wealth levels they thought they had permanently attained.

What are the lessons of the 2009 Great Recession and aftermath?  Certainly, there were the same problems of lack of diversification and a belief that, in this case, real estate and finance were on an unalterable path to higher levels, pulling overall financial markets higher at the same time.  But what of the aftermath of 2008-09?  In this regard we may be talking about long term fears that were generated rather than objective lessons.  Fear of sudden losses, fear that the whole structure on which financial values are based may be fragile or even phony, fear that the game is “rigged” or based on nothing more than the interplay of greed vs. fear.  The aftermath of 2009 generated these fears in many of us, exacerbating market turn downs in the years following 2009 as people shoot first and ask questions later regarding their stocks, or crowd the exits all a once at the slightest hint of distress, causing values to drop — pick your favorite metaphor.

The market crash of 2008-09 remains a powerful phantom over current investors, residing in the pit of your stomach on bad days, and is the little voice warning it all could be a mirage on the days of record setting market averages.  Therefore we have another element of staying grounded, which is to not to be overly fearful.  That is not to say be pollyannaish.  But the economy can be solid, sometimes for years at a time.  Companies and businesses can be strong and get stronger and more valuable.  Again it is helpful to remind ourselves that every day millions of people get up and go to work, creating value, performing services, inventing, solving problems and making human life, on any number of measures, better.  This work creates the value that investors, often the workers themselves, can reap via dividends paid, and capital gains accrued.  Investing is not a mirage when based on fundamental values like profits, revenue, asset value and the likelihood that such income can be generated for years into the future.  So perhaps there is a simple way to think about it — staying grounded as an investor means investing in things that are themselves grounded, whether stocks in successful, profitable companies, or real estate with proven income potential, or even bonds in which the debtor has ample money to pay interest and principal.

Today’s markets are dominated by world beaters that have been in plain sight for years, whether Facebook (FB) or Alphabet (GOOG) on the internet, or Apple (AAPL) in technology, Netflix (NFLX) in entertainment,and Amazon (AMZN) in e-commerce.  Until recently, many of these stocks could be bought for lower multiples than slower growth, less profitable companies.  But there are many companies that have, in a quieter way, proven their dominance and excellence,  making terrific long-term investments by those that made decisions grounded on fundamentals, not hype, and not irrational fear that great companies are built on sand.  For example, Boeing (BA) in airplanes, Lockheed-Martin (LMT) in defense, Salesforce.com (CRM) in business software, Electronic Arts (EA) in gaming, Honeywell (HON) in industrials, and Digital Realty Trust (DLR) in real estate, to name just a few.

Arrival Capital continuously tries to build and shape client portfolios based on a grounded, value-based philosophy designed to understand which companies are poised to deliver sustainable financial performance in the years ahead.  We look for investment opportunities sometimes generated by overall market weakness, sometimes company-specific but, in our view, transitory setbacks, sometimes newly emerging, less well-known companies poised to deliver long term value creation, and sometimes just recognizing that well-regarded companies are actually not well-regarded enough by a market as a whole more in thrall to short term concerns.  Whatever the method of finding great investments, we can then shape them into a diversified, value-based portfolio that works for clients looking for long-term wealth creation but with a margin of safety that prudent investing, as opposed to emotion-based speculating, can provide.

If this type of investment management can be of help to anyone you know, please have them give us a call.  In the meantime, have a terrific rest of the summer!

 

 

Investing Smartly in an Uncertain World — Q2 2017 Investment Update

Posted by on April 26, 2017

Resilient.  What else to call a US stock market that once again is making new highs?  Here at home, with political animosity seeming as high as it has ever been, the market moves higher, amid ongoing uncertainty over the future of healthcare, taxes, foreign policy, trade and many other pivotal questions we count on our political system to decide.  Over in Europe, there are similar clashes over nationalism, the EU, Brexit, and immigration, to name just a few of the issues plaguing one of our largest trading partners.  Yet markets the world over march higher, following and sometimes forecasting higher corporate earnings and GDP as well, domestically and overseas.  Interest rates remain low, as does inflation, and employment is at generally high levels, all suggesting an economy that is at least stable for the near future.  All this makes us wonder if all our political distress, as painful as it seems, may really be the classic “first world problem” we often use to describe things that are annoyances and nuisances of 2017 life in the West but not matters of life or death.  In fact, comparing our democratic system, with its rule of law, vibrant civil society, activist press, and strong free-market economy with the many places in the world gripped by civil war, famine, endemic corruption, or truly authoritarian rule, we can begin to see that our economic system truly is resilient, with businesses mostly free to prosper or perish based on market forces, and thousands if not millions of individual decisions made by consumers, workers and managers. Viewed this way, it is not surprising that our economy and thus the performance of our stock market can sometimes detach from the apparent ineffectiveness of our politics, at least for a time.

Investing smartly in an uncertain world therefore starts on an assumption of the resilience and dependability of our financial system and market economy, despite political and cultural turmoil. That leads to the first lesson for an investor — do not be left behind by the economy as a whole.  Notice that doesn’t mean never losing money. Sometimes markets and investments decline.  But for the most part economies grow, and investments in businesses that provide the goods and services for that growing economy will increase in value over time.  As Warren Buffet likes to say, never bet against the long term success of the American economy.  Investors, at the very least, need to participate in this growth, otherwise the cash under the proverbial mattress will lose steadily each year to the forces of inflation.  As we often remark to potential clients, the decision not to invest is just as much a decision as what stocks to buy.  For new investors or those with their first real levels of accumulated wealth, the starting point can be a collection of diversified index funds that will virtually guarantee some participation in the economic growth of the country.  But we believe that indexing is a start rather than an end to the investing process.  Average should not be the ultimate goal of investors with the means to personally or through a skilled practitioner understand market conditions and meld them with individual or family goals and financial needs to construct a portfolio that protects wealth while seeking to grow it through creation and management of a personalized, diversified investment portfolio using fundamental principles of value investing.

We are often asked how a boutique money management firm can compete in financial markets with huge hedge funds and algorithmic traders moving around giant sums of money.  But in our experience, these market participants, with their hair triggers and the waves of money they send sloshing around financial markets, create the mispricings that a disciplined, long term investor can use to his or her advantage.  A small earnings miss or minor business announcement, signifying little about the long term can cause a 5-10% decline  in the share prices of individual businesses or sometimes even entire industries, making a good potential investment into a great one, taking into account the reduced starting price.

On a more general level, being a value investor means taking advantage of a number of situations creating advantageous long term investment opportunities.  Among these are the market price (with its typical short term focus) under-appreciating how a somewhat dominant company can actually expand it dominance and thus profitability as economies of scale and the network effects of scale take place.  Also creating value can be one-off company disappointments that, in the opinion of an investor, but not the market as a whole, do not subtract fundamentally from the brand value or future profitability of an enterprise.  On an industry level, sometimes temporary barriers to profitability arise and are assumed to be long term, as with energy last year, and most of retail today. Again, short term fear being a friend to long term wealth creation.

Arrival Capital believes that disciplined, long term value investing tailored to individual financial circumstances can create meaningful long term wealth in a way that putting your entire net worth in a mix of index funds simply cannot match in terms of personal control and balancing of risk vs. reward.  We welcome the opportunity to serve the needs of investment clients for whom average is not good enough, either in the service they receive or the long term results they can expect.  Have a terrific Springtime!

 

 

 

A New Era Begins — 2017 Investment Thoughts

Posted by on January 30, 2017

We usually write our annual investment preview right after New Year’s Day, sometimes sneaking in a few extra days to try to gain some additional clarity on the year to come.  This year, however, we waited until a new political era dawned, for good or ill, with the inauguration of President Trump ten days ago.  Readers undoubtedly will have a range of opinions on the new president, but all can agree that the economic and thus investment implications are profound and far-reaching.  There are cross-currents everywhere you look.  People march in the streets, yet stock markets the world over are at or near record highs.  Many are despondent over the state of US politics, yet consumer confidence is as high as it has been in years.  The country is bitterly divided politically, yet capital and consumers seem overwhelmingly optimistic.  Can one be depressed politically but exuberant economically?

The above question is not so easy to answer.  The pages of Twitter and Facebook are full of anger and sadness vowing resistance to the new Administration, not least over the latest battles over immigration.  Yet I would bet many of these same people are working at businesses doing better than in a long while, with 401(K) holdings and home values markedly higher.  This isn’t the work of a week in office but of an economy that seems to have gained traction as 2016 wore on after a depressing start.  The election sweep of Republicans in Washington may also have contributed to the feeling that something, anything, will finally be done to contribute to the economy, whether it is infrastructure spending, tax reform, or right-sizing the regulatory burden.

Companies reporting 4th Quarter earnings this month have, for the most part, shown real growth in earnings and sales.  Obviously these results came before the Inauguration and only two-thirds after the election.  But the pattern in many important industries is clear.  Boeing (BA) sold a lot of planes.  Netflix (NFLX) added many subscribers.  Skyworks (SWK) sold an incredible amount of semi-conductors, to name three of Arrival Capital’s favorite large cap investments.  The election may have crystallized a belief of business and investors that an improving underlying economy will now be the beneficiary of a government-inspired tail wind that will carry successful businesses to even greater levels of profitability and investors to greater profits.  These benefits, if they materialize, will of course even accrue to investors who do not share the Administration’s goals, or support the means to the ends.

There are, of course, reasons to remain cautious.  The amount of rancor and divisiveness in the air is harmful not only to the national mood but also undercuts the chances of bi-partisan support for economic change for the better, whether infrastructure spending, lower taxes or reduced regulations.  The new Administration’s impulses on curbing trade and managing international affairs with China and other rivals may inhibit the growth of a more vibrant and productive economy the world over.  After a crazy weekend of airport detentions and marches, weeping senators, hysterical commentators and cautions Republican lawmakers, the market is down more than 1% late-morning.  Politics continue to matter, as does competence in managing policy changes. Remarkably, the President’s tweets still matter to individual companies, witness the move in Lockheed Martin (LMT) today.

Strategically, Arrival Capital has adhered to an approach of value investing in companies that are not only cheap statistically but also in the political sweet spot in that they are in the energy, materials and/or industrials segments that could stand to benefit most in a sustained economic upswing.  In keeping with our value investing philosophy, however, we also look for good, cheap entry points in tech stocks and healthcare businesses, that have largely trailed the recent market surge.  Of course, there are always the un-correlated opportunities in stocks that have fallen or lagged for non-political reasons that we view as temporary overreactions, as with media stocks last year, and lately have included REITs, restaurants, retail and clothing manufacturers.

We have found that creating a diversified portfolio of undervalued stocks has actually gotten a little easier of late because the economic and political cross winds have created so many different investing opportunities as uncertainty temporarily sweeps through one industry and then another.  Our job then becomes knowing the baseline expectations of individual companies, seeing how temporary concerns affect valuation, and, finally, considering whether risks to a company’s prospects are being correctly or overly discounted by the market price.

Investors are people, too.  We understand if some of you might be too angry to unemotionally analyse potential economic outcomes, or, possibly, too giddy in your expectations.  We would only remind investors that the best thing you can do for your own financial security is to try to build wealth through reason and a careful weighing of potential risk vs. reward.  With enhanced wealth, you are freer to support not only your family and loved ones but also the causes that are dearest to you.  At Arrival Capital, we are here to support investors, families, and individuals with the best, most dispassionate advice possible and make the future a more secure one for us all.

To our clients, thank you for your continued trust and confidence in these turbulent times; and to others concerned about their own financial prospects, please consider giving us a call today.

 

 

 

 

 

Arrival Capital’s Fall 2016 Preview

Posted by on September 23, 2016

Well, with summer officially over, attention now turns to autumn, traditionally a time that sizzles with vigor and opportunity along with uncertainty and the sense of another year heading into the history books.  Before looking ahead, however, one more look back at summer is warranted.

For Arrival Capital Management LLC, the summer of 2016 was a season of exciting changes.  First, we moved offices to a beautiful commercial townhouse on New York’s Upper East Side, at 94th Street and Lexington Avenue.  We hope you will pay us a visit if your are ever in the neighborhood.  Second, and more far reaching, Arrival Capital stepped up it’s capacity to effectively serve clients with a new institutional relationship with TD Ameritrade (TDA).  TDA will serve as our primary custodian for individual client accounts.  This new relationship will give Arrival Capital more sophisticated analytical and practice management tools that will ensure your investment management is state of the art, yet will continue to be based on timeless concepts of value investing and contrarian analysis individually tailored to each client’s investment needs and goals.

But enough about us.  The summer was a time of low volatility and glacier-like but upward market movements.  This came after a negative 2015 and a more than 10% drop to start off 2016, as well as another sharp drop on the day of the Brexit vote..  What turned the negativity around?  The easy answer is the concept of TINA, standing for “there is no alternative” to US stocks, given global uncertainty and record low or even negative interest rates around the world.  Even 1-2% growth is better than nothing, goes the thinking.  There is certainly some truth to this school of thought.  But markets are also fairly adept at pricing in future profit potential, and one can’t help notice that through a cloud of negative market sentiment fanned by the so-called “smart money”, market participants seem to be anticipating higher profits and a generally benign business environment in the near future.  Skeptics might term this complacency, but we would would suggest that the country’s problems and challenges are front and center, particularly in a fraught election year.  But with unemployment fairly low, and energy and food prices continuing to stay down, it appears that the American consumer still has the wherewithal to sustain American businesses.

The great unanswered question continues to be whether American business will step up and resume investing in both people and productivity enhancements that will carry us forward in a more sustained way economically.  Another wildcard is whether the rest of the industrialized world, whether Europe, China, Japan or Great Britain, can get the most of their own people and businesses. Obviously, these questions are still outstanding, as is the American presidential election.  But the market is telling us, despite the uncertainty, that people continue to be productive and generate value, which investors can capitalize on by taking advantage of market disruptions and recurrent bouts of investor pessimism to snap up the most attractively priced, genuinely strong businesses out there in the world.

How to identify those companies?  It is both art and science.  Observing societal, cultural and business trends is vital.  For example. knowing how today’s young people consume media and entertainment (hint: YouTube and Xbox), or how people pay for things (Visa and PayPal).  Understanding what is working in the world also means staying with companies even through temporarily tough times which are treated as permanent impairments by investors at large (see Apple and just about every drug and biotech company at times).  Finding enduring strength sometimes means stepping up when people are running for the exits (see Chipotle and the major media companies like Fox and Disney).

The modes of thought required to find good investments at great values is varied but the underlying methodology is the same: buy value, buy underpriced cash flows or assets, buy low.  Don’t chase and don’t panic.

Circling back to the year we’ve had so far, we don’t want to sound the all clear or to dismiss those advising caution.  The world is uncertain, times are unusual economically.  Those sounding the alarm have some valid points.  But the way we take into account the potential for somewhat bad outcomes or the so-called “tail” risk of a small chance of something really bad happening is to stick to value investing and hold cash.  The percentage of cash depends on a number of individual variables, but in a low interest world, cash is the place to be as a complement to a well-diversified equity portfolio.

Autumn, despite the falling leaves, is a time of new beginnings, big and small.  The right investment portfolio can undoubtedly make a difference in people’s lives and help them discover new possibilities within themselves and for their families.  Come stop by Arrival Capital or give us a call, and let’s start planning a better future.

Have a great autumn.

 

2016 Q1 Review — A Tale of Two Directions

Posted by on March 31, 2016

On the afternoon of February 11th, less than two months ago, major stock market averages were down more than 10% to start off the year, one of the worst performances to begin a year in decades.  This awful start followed a negative year for most stock markets in 2015.  What was driving the negative performance and pessimistic mood?  A litany of concerns including declining growth in China, a rapidly falling price of oil, fears of a slowdown in the US economy and a general sense of fear and malaise that the world economy was teetering on the edge of recession or worse.  With all this, then, the best response was to … start buying hand over fist!  Yes, navigating stock markets are never truly easy, but understanding human emotion, and specifically that age old battle between fear and greed, can continue to map an approach for the astute investor at even the darkest of times.

The declining price of oil was perhaps the single biggest factor driving stock market declines.  Down from a price in 2014 of $100 to the mid $20’s this past February, oil’s scary decline brought down with it the price of other commodities as well as the entire high yield bond market.  This despite the fact that declining energy prices gave US consumers more money to spend on other items (except for those whose jobs depended on energy).  But throughout 2016 up to February 11th, oil kept going down, dragging stocks with it.  But, as we remarked at the time, oil is not going to $0, they won’t pay people to fill up at the gas station.  That meant that at some point oil prices would stabilize and with it, so would the price of stocks.  As with everything in this 24/7, hyper-connected world, this final bottoming process took place in a matter of days, followed by a move up in stocks to basically where they started the year.

So what was the proper response in those dark days of early February?  It is surely 20-20 hindsight to say you should have bought everything in sight.  But perhaps the better lesson is not to ever get too negative or too positive.  Instead, let the numbers of particular companies and investments drive your analysis.  What were sales and earnings looking like?  What trends, multi-year and industry specific, would take precedence over the temporary ups and downs of energy prices?  What companies’ stock prices were being driven down with the market as a whole even as those companies had prospects and opportunities that merited rising prices not falling ones?  Yes, an investor needed to keep an eye on China, oil prices, the Euro, interest rates and a host other factors.  But these were the proverbial trees and an investor’s job remains to see the trees but never lose sight of the forest.  And what is the forest?  Simply stated it is value.  Analyzing what investments are intrinsically worth, based on profits, assets, intellectual property, and future prospects, all examined against a realistic appraisal of the overall economic situation as it is in the present and likely to be in the near future.  This may produce a range — if there is a recession, company A may be worth x, if an economic boom, it may be worth 3x, but in the most likely economic scenario, it will be worth 2x.  And if the company is already selling at x, then the clear response is to buy the stock no matter how gloomy media commentators and prognosticators are in their assessments.

Investing remains about process and detail, but it is also about constantly searching for value, being opportunistic and, sometimes, blocking out the raw emotion of the times from investment decision making.  Arrival Capital takes this approach to investing client funds, and augments the discovery of value-based, wealth generating investments with the hard work of ensuring each client has a diversified portfolio that can survive difficult economic climates yet also profit handsomely when the economy provides a beneficial tail wind or at least is neutral to the process of specific investment values being unlocked.  If you or a friend, acquaintance or loved one can benefit from this type of personalized, value-based approach to investing and wealth management, please give us a call anytime.  In any event, have a terrific Springtime!

A Tricky Year Draws to a Close — Q4 2015 Investment Update

Posted by on November 20, 2015

Nearly eleven months into 2015 the Dow Jones Industrial Average is unchanged for the year and the S&P 500 index is barely positive.  Does that mean all the ups and downs, the emotional swings caused by August’s abrupt market correction (a more than 10% decline) and autumn’s swift recovery were all meaningless?  Not exactly.  The volatility, the hand wringing, the apparent global pessimism, are all part of a process of pricing in expectations as well as justifying the historical outperformance of stocks over the long term.  The volatility of August and September is the price we pay for long term positive returns that beat inflation.  For a value investor such as Arrival Capital, moreover, the extreme pessimism that accompanies stock market declines creates the opportunities that can lead to long term outperformance with a lower level of risk.

Over the past few months, general market downturns have combined with certain industry-specific overreactions to create particularly intriguing opportunities.  For example, a summer warning by Disney (DIS) about ESPN cable subscriptions led to a huge sell-off in major media stocks.  Some of the these stocks have invaluable media franchises as well as production and distribution assets that represent terrific long term value at the right price.  In healthcare, and particularly pharmaceuticals, a couple of high profile drug company missteps cast a pall over the entire industry that may provide attractive entry points for long term investors.

Of course, value investing is not always easy.  Energy, for example, is an industry facing hard times and low prices.  But is it really time to step up for a long term investment?  The jury is still out but we continue to believe there may be a place for energy pipeline and infrastructure businesses in many investors’ portfolios.

The upshot of all this is that even if 2015’s returns may not rank in comparison with the stand out returns of the past few years, the summer sell-off of 2015 and general market malaise throughout the year presented value investors with a chance to accumulate positions in investments promising a chance at strong returns and yet have the requisite margin of safety all value investors should seek.  Finding good companies at great prices or great companies at good prices, value investors can use years like 2015 to set up a portfolio for years of strong returns with hopefully a lower level of risk than the market as a whole.  That really is the name of the game in a nutshell.

Finally, as we head into the week of Thanksgiving, let us take a moment to be thankful for those in our lives, whether family or friends, clients or co-workers, that provide the joy and purpose to our lives, as well the humor and camaraderie.  Have a happy and healthy Thanksgiving.