Reducing Volatility and Adding Value Stocks

Asset Management, Companies and Industries, Investment Themes, The Economy October 24, 2019

Reducing Volatility and Adding Value Stocks

Trading activity last quarter was consistent with Nelson Roberts’ pivot to reduce volatility and add more value-oriented stocks to our portfolios. In the financial sector, we exited SVB Financial Group (tkr: SIVB). As the trade war continues with no deal in sight, we feel it is important to limit exposure to Chinese markets. SVB Financial Group has exposure to China not only through a joint venture, but also through Chinese investors as a source of funding for their clients. 2019 has marked a banner year for IPOs, with many of these companies being SVB clients. This drove stronger earnings the past few quarters, but SVB will be challenged to carry that momentum forward. SVB does not pay a dividend and is more volatile compared to traditional banks. We do not see a catalyst for SVB to return to a significant valuation premium relative to other banks in the near term.

Selling SVB Financial Group enabled us to add to our position in Charles Schwab (tkr: SCHW). Schwab is trading more in line with traditional banks rather than online brokerage firms with a P/E ratio of about 9x. Schwab is the leader in the Registered Investment Advisor (RIA) market, which has enjoyed greater growth than the broader financial sector. Schwab’s current valuation is low and has been beaten down recently as a result of the lower interest rate environment and negative investor sentiment, providing us an opportunity to add to our position at an attractive price.

In the technology sector, we took advantage of strong performance to trim our position in Akamai Technologies (tkr: AKAM) with shares trading near an all-time high. We maintain a position in Akamai because of the upside potential from over-the-top (OTT) video content streaming, particularly with Disney and Warner Media streaming services launching this year. However, Akamai was a large position in our portfolios and we believed that much of this upside may already be priced in. Akamai also has a tendency to be a volatile stock, especially around earnings and it does not pay a dividend. We concluded that reducing our position in Akamai was appropriate, though we still maintain an overweight relative to the S&P 500.

Finally, in the healthcare sector, we sold Pfizer (tkr: PFE) due to the news of its complex upcoming transaction that contradicts our initial investment thesis. We originally bought Pfizer due to its solid pipeline, commitment to R&D, and its healthy cash flow which could support a generous dividend and buybacks. In mid-2020, Pfizer plans to spin off Upjohn, the off-patent medicine unit, and merge that company with Mylan (tkr: MYL), creating a new global pharmaceutical company focused on off-patent medicines. The new company will be U.S.-based and will likely become the largest generic company in the world, surpassing Teva (tkr: TEVA). Mylan, a troubled company with high debt and lack of transparency, is not a component we would like in our portfolio at this time. The new Pfizer is aiming to see increased EPS growth, as it will no longer be dragged down by slowing sales of off-patent medicine, and the recent acquisition of Array BioPharma Inc. holds significant promise for new drugs. However, we believe it will likely take a couple years before all the dust settles. The major changes resulting from the upcoming transaction represent a significant shift in strategic direction for Pfizer, from a stable and reliable pharmaceutical company to a riskier growth company.


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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