By: Stash Graham
As the summer months start approaching an end, all three major domestic indices modestly appreciated as they were able to battle off broad weakness towards the end of the month. The Dow Jones Industrial Average appreciated by a little over +1%, as did the NASDAQ, which added +1.2%. The S&P 500 grew by more than +2%. The weakness shown towards the end of the month was capsulated best by NASDAQ and S&P 500 bellwether, Amazon Inc., which lost almost -8% on the last trading day of the month after the conglomerate missed top-line revenue estimates and gave weaker earnings guidance for the rest of the fiscal year. For the month, utilities, healthcare, real estate, and most of the technology sector outperformed, while financials and energy stocks detracted. Our gold tracking position (ticker: IAU) increased by a little more than +2.5%, while our broad commodity basket position (ticker: PDBC) grew by almost +1.4%.
The economy grew by +6.5% in the United States for the second quarter. The headline number does mask some strength shown by the consumer who showed enthusiasm for the services sector. While the headline number was below initial estimates, which were calling for more than +10% of economic growth from the Atlanta Federal Reserve, the results overall were good. However, it is essential to keep in mind that the second quarter benefited from significant fiscal stimulus/transfer payments from Capitol Hill in March. Those funds made their way into the economy in the following months during the second quarter. Unfortunately, as we look forward to the third quarter, estimates of GDP growth are starting to come down. The New York Federal Reserve is now estimating +4.1% in GDP growth for the third quarter, down from +5.3% just a few weeks ago. While economic growth is always welcomed compared to economic contraction, it is worrying that economic growth projections continue to decline. This decline coincides with government support materially falling off, and the Federal Reserve possibly reducing monetary support in the fall or winter months (“tapering”). If these economic growth projection declines continue, the Federal Reserve might struggle to start reducing the number of asset purchases.
The housing market provided a powerful tailwind for the overall economy over the last few quarters. We are watching the mixed results very closely from pending home sales in the previous six months. For June, we saw pending home sales shrink by -1.9%. Consensus estimates had expected no change. We have witnessed declines in pending home sales in four of the past six months. The pending home sales metric is crucial as they are a well-recognized leading indicator on the housing market. Even after the stock market run-up, housing represents the most significant asset controlled by most American households.
Finally, we continue to monitor the developments regarding the delta variant and how this could impact the economy. We have witnessed upticks in cases, hospitalizations, and fatalities, but mainly due to vaccinations, hospitalizations and deaths remain below average compared to recent waves. From an economic perspective, we feel that some of the most at-risk groups are least likely to change their behavior. The regions that are currently grappling with this variant have a lower weighting in the overall economy. The risk to our line of thinking is that we witness a more potent variant that proves to be even more resilient to the antibodies that people received during their vaccinations or COVID infections. This development could cause states to reverse school opening decisions while in a race to get booster shots available for their populations. As we saw last year, this will force a portion of the people to stay at home to take care of their kids instead of seeking employment. Lastly, this could cause a percentage of the population to also self-isolate, hurting sales from the services sector.
Please see the following updates on existing positions held at the firm:
Verizon (Ticker: VZ)- The telecom giant reported top and bottom-line beats for the second quarter of the year. Company leadership issued strong guidance of which the market liked and rewarded the stock price with a +2% on the morning of the earnings release. Of note during the call, company leadership noted the strong adoption of 5g related services. Additionally, the company reported the most robust subscriber growth since 2015 in their Fios internet services. Fios-related revenues reached $2.9 billion, surpassing pre-COVID levels, driven by the continued uptake of gigabit speeds. Overall, this was an encouraging report from one of the most well-trenched companies in the country. We continue to plan to hold this position and collect the above-average dividend yield while we wait for the market to give Verizon more respect. The 4.5% annual dividend yield is almost 200% more than the average S&P 500 dividend yield. The company will pay out the next dividend in the first week of August.
Old Republic International (Ticker: ORI)- The reinsurance company traded lower on their earnings’ day despite posting solid quarterly earnings, including substantial growth in the General and Title insurance businesses’ profitability. The second-quarter total operating revenue of $2.13 billion jumped from $1.68 billion in the same period last year, beating the consensus estimate of $1.71 billion. Net premiums and fees earned in the second quarter increased to $1.98 billion from $1.54 billion in the same quarter of last year. General Insurance combined ratio, which measures an insurers’ profitability, improved to 94.0%, driven by premium rate increases for most lines of coverage and new business production.
American Tower (Ticker: AMT)- Midway through the month, we exited our position in cell tower giant after a strong run of the stock over the last five months. On average, our initial purchase price was $215-$217 per share, and when we exited, we received approximately $280 per share. While we feel comfortable with the company and their story, the stock ran high too fast, too soon. Nevertheless, the 30%+ nominal return is a strong one considering the short time frame. We will continue to monitor the company.
Agree Realty (Ticker: ADC)- The triple net lease REIT announced the result of a busy second quarter. ADC announced the acquisition of 54 properties for an average lease term of 11.8 years and a capitalization rate of 6.2%. In addition, company leadership announced an increase in their 2021 acquisition target total to $1.4 billion. The prominent transaction of the quarter was a five-store leaseback deal with Kroger for $68 million. Each grocery store is contracted under a new 15-year lease. Finally, at quarter’s end, the portfolio of investment grade quality rental tenants continues to remain in the upper-60% range (~68%).
Recess is here for the House of Representatives, who are not scheduled to return to vote until September 20th. In addition, the eviction moratorium has now ended, no infrastructure bill has been signed into law, the debt ceiling has been reached, and there are vast disagreements on how the government should be funded (government shutdown). We are monitoring all these developments as we now enter what is historically the worst season for stock market returns (August to October). Please feel free to reach out with any questions!
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