Adding to Small-Cap and Maintaining Low Turnover
The first quarter was fairly quiet in terms of trading as we maintained low turnover in our portfolio. We made a decision to increase our small-cap stock exposure by adding to our position in the iShares Core S&P Small-Cap exchange-traded fund (tkr: IJR). Small-cap stocks tend to be more volatile than large-cap stocks, which can be beneficial in an overall rising stock market. Smaller stocks also generally have more domestic exposure, which we believe will be a positive attribute given the demonstrated strength of the US economy. More domestic exposure also means that smaller stocks are usually less susceptible to adverse effects due to strength in the US dollar. When the US dollar strengthens, US products become more expensive to foreign buyers, making US products less competitive on the global market. This is why multinational corporations will often see international revenues fall when the US dollar strengthens.
In addition to adding to our small-cap position, we decided to trim two of our other holdings. F5 Networks (tkr: FFIV) has performed very well over the past year, rising about 50% due to optimism about several new networking hardware product releases. Over that timeframe, its price-to-earnings ratio expanded from 17 to 26 as investors cast aside the macro worries, including a challenging European sales environment, which had plagued the stock throughout much of 2015. Over the longer term, we see a potential threat to F5 if some of the larger cloud vendors, including Amazon, develop more sophisticated cloud-based load balancers. For now, F5 offers a customizable and high-performance hardware solution that gives it an advantage in a hybrid cloud environment, but if cloud-based load balancers begin to command a larger percentage of the Application Delivery Controller (ADC) market, this will impact F5’s growth. We still believe F5 will continue to perform well in the short term with its new products, particularly because it will have easy year-over-year comparisons in the coming quarters. For this reason, we trimmed our F5 position, but still maintain an overweight relative to the S&P 500 Index.
We also decided to trim TJX Companies (tkr: TJX) to bring our consumer discretionary weighting in line with our target weight. TXJ Companies, which includes TJMaxx, Marshalls, and HomeGoods stores, has performed very well in spite of a secular decline in retail. The company has managed to increase its top and bottom lines as well as its comparable-store sales by effectively managing inventory and fostering a “treasure hunt” mentality. Inventory turns over rapidly, and customers never know what they might find. As larger department stores deal with declining sales and inventory glut, off-price retailers such as TJX Companies benefit as they can scoop up that inventory at a lower cost. However, department stores have begun attempting to boost sales by making changes, including tightening inventory, which could affect TJX Companies down the road. Nevertheless, we maintain an overweight position in TJX Companies relative to the S&P 500 Index since we believe it is an extremely well-managed company that has demonstrated it can weather the storm even through a secular retail decline.
Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.