Adding Value Exposure

Asset Management, Companies and Industries, Investment Themes August 8, 2019

Adding Value Exposure

The choppy market in the second quarter allowed us to continue repositioning our equity portfolio. We trimmed our position in Roper Technologies (tkr: ROP) following an impressive run in the stock. We originally purchased a position in Roper in early 2016. The company employs an acquisition strategy, buying companies that have established a majority market share in a niche market. They have strict cash flow requirements for their targets, and the business model has proven very successful. In recent years, the company changed its name from “Roper Industries” to “Roper Technologies,” as the company began to focus more on software-as-a-service (SaaS) companies that are technology-oriented. The focus on software companies and their recurring revenue model has paid off, boosting both organic growth and margins. However, it has also increased Roper’s valuation and its volatility. We took the significant increase in the stock price as an opportunity to trim the position, though we maintain an overweight relative to the S&P 500.

In the healthcare sector, we sold our position in Allergan (tkr: AGN) in mid-April. The company faces several challenges, including the loss of patent exclusivity for Restasis, one of its key drugs, as well as increasing competition in the aesthetics space, particularly for its signature product, Botox. Allergan subsequently dropped to a low of $115 before it was announced on June 25th that Abbvie (tkr: ABBV) had agreed to acquire the company, sending Allergan shares to around $165. We redeployed the proceeds to buy a position in the large pharmaceutical company, Pfizer (tkr: PFE). Pfizer is an inexpensive value stock with a low price-to-earnings (P/E) ratio and a high dividend yield.

In the technology sector, we trimmed our position in (tkr: CRM) and added to our position in Microsoft (tkr: MSFT). Salesforce, the leading cloud company, has maintained substantial growth through its expansion into ancillary services beyond its signature “Sales Cloud.” However, its valuation had become stretched and we see increasing signs of competition in these services from the larger cloud providers. Salesforce has been making large acquisitions to maintain its growth, often paying top-dollar for its target companies. Although Salesforce has demonstrated success with large acquisitions in the past, we trimmed our position to reduce some of that risk. Microsoft is a less volatile stock with a lower P/E ratio and higher dividend yield that also has been executing well in the cloud market. Our target Microsoft position is now roughly in line with the S&P 500.

We purchased a small position in the Vanguard Utilities ETF (tkr: VPU). With the Federal Reserve’s about-face and the rapid decline in interest rates, utilities becomes a more attractive sector. Nevertheless, we still see secular challenges for utilities companies as the trend toward energy-efficiency continues, so we purchased an underweight position relative to the S&P 500. The Vanguard Utilities ETF compares favorably to other comparable options from a risk/reward standpoint.

In the REIT sector, we purchased a position in Digital Realty Trust (tkr: DLR). Digital Realty Trust is the 8th-largest REIT in the S&P, with a focus on datacenters. In recent years, the company has focused on fast-growing ancillary services such as colocation and connection, an area that arguably has significant runway. Peer Equinix (tkr: EQIX) also focuses on the datacenter space, which we believe is attractive given the increase of data creation, but Digital Realty Trust has a lower valuation and higher dividend yield.

These changes are consistent with our goal of increasing the cash flow generated from dividends while reducing overall portfolio volatility.

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.

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