Poised to Perform

 
Asset Management, Companies and Industries, Investment Themes, The Economy October 29, 2020

Poised to Perform

In the third quarter, we sought to add relatively undervalued stocks in companies that are geared to perform well both during the remainder of the pandemic and in the anticipated recovery.

In the real estate sector, we bought a position in Iron Mountain (tkr: IRM), the global leader in document storage and information management systems. Iron Mountain has a reliable core business and boasts a hefty 9.5% dividend. To facilitate growth, the company is working to expand into new areas such as data centers. We trimmed our position in Ventas (tkr: VTR), reversing a strategic tax loss purchase in taxable accounts. However, we retained a small holding, as Ventas is well-positioned over the long term to benefit from an aging baby boom population.

We purchased Adobe (tkr: ADBE), the leading provider of content creation software. Adobe is a software company with a recurring revenue stream, which should insulate it from some of the negative effects of the COVID-19 outbreak.

In the consumer discretionary sector, we bought a position in Chewy (tkr: CHWY). Chewy is the largest pet “e-tailer” in the world, offering the speed and convenience of e-commerce with the personalized service of a neighborhood pet store. The growing humanization of pets and focus on pets as family members has led to increased spending on pet care products and services. Chewy is benefiting from the pandemic, with record numbers of pets being adopted and people gravitating toward online shopping.

In the healthcare sector, we sold our position in Gilead (tkr: GILD) as there are no near or medium-term growth drivers for the company. Its popular HIV drug, Truvada, is going off patent this year. Additionally, UnitedHealth Group said it would not cover Gilead’s other HIV drug, Descovy. Lastly, the multiple acquisitions that Gilead has made recently are not ready for prime time, and it will likely be two years or more before any of Gilead’s new drugs have a meaningful impact on revenue. We bought a position in Quidel (tkr: QDEL) a company that helps make healthcare more efficient by focusing on “point-of-care” diagnostic testing. Though Quidel has benefited from the release of its SARS-CoV-2 molecular assay and antigen tests, we believe there is opportunity for point-ofcare testing in many other applications beyond the pandemic. Furthermore, as flu season kicks into full gear, it will be crucial to differentiate COVID-19 cases from flu cases.

We trimmed our position in Alphabet Inc. (tkr: GOOG) to a market weight as we noted elevated risks for the company. Aside from the increasing regulatory threats, we reduced our portfolio’s total exposure to the five largest stocks in the S&P due to concerns about market concentration. Alphabet also has large exposures to travel and leisure customers that have been impacted by the shutdowns due to COVID-19.

In the industrial sector, we sold our position in Eaton (tkr: ETN) and replaced it with Trane Technologies (tkr: TT). Trane Technologies is a dominant player in commercial and residential heating, ventilation, and air-conditioning (HVAC) systems, as well as in transportation refrigeration. HVAC providers may see an uptick in commercial HVAC business, as having updated ventilation in buildings will be essential for employees to safely return to offices. We expect air filtration, air-quality assessment, and touchless access control solutions to become larger market opportunities due not only to COVID-19, but also the smoke from the disastrous west coast wildfires. Longer term, the shift towards sustainability and energy efficiency provide additional tailwinds for the 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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