The Tufton Viewpoint, Winter 2018: Confidence is King

by Chad Meyer

In this space, a bit over twelve months ago, I admitted that I didn’t have a clue what sort of market 2017 would bring. “Perhaps the economy will thrive…buoyed by the message that America is now ‘open for business’,” I wrote. “Or perhaps…our new president-elect will prove uniquely problematic, unduly influencing the market one late-night ‘tweet’ at a time.”

On Wall Street, however, where confidence is king, well-paid prognosticators were obliged to issue a more definite outlook. And as you may recall, that outlook was rather bleak. On January 3, 2017, CNBC reported that Wall Street’s collective annual forecast was the most bearish it had been in over a decade. The following day, Goldman Sachs warned clients of “downward pressure” on U.S. equities. With sociopolitical tumult and a bull market that was officially long in the tooth, it seemed as though worrying over a slowdown was the respectable analyst’s only prudent move.

What happened next is history. Over the last twelve months, that bull market has grown even longer in the tooth, surmounting the Street’s “wall of worry” (and continued sociopolitical tumult) in truly rare form. In 2017, while volatility sat at historic lows, the S&P 500 rose 22% (total return), posting its largest yearly gain since 2013. Not to be outdone, the Dow Jones shot up 25%, its second-biggest annual gain of the last decade. With this increase, it turned in nine consecutive months of growth, its longest streak since 1959. So much, it would seem, for those January jitters.

Yet, pleasant as the market’s surprises were in 2017, one question still looms large. What should investors expect in the year ahead? Given the strong start U.S. equities have already had in 2018, it’s no surprise that many once-dour pundits have taken on a sunnier tone. Open the morning paper, and you’re likely to read about the market’s “record run,” spurred on by an encouraging global economic outlook. As Goldman Sachs’ asset management arm now succinctly puts it, “We think equities will continue to outperform in 2018.”

We certainly hope Goldman Sachs’ prognostication will prove to be the case. However, all good things must eventually come to an end, and we at Tufton Capital will continue to implement a bottom-up, value-driven investment philosophy that delivers performance in a strong market—and perhaps more importantly – provides peace of mind when things take a turn for the worse. For twenty-two years, this approach has kept our clients in good stead from the “Great Recession” of 2008 throughout the “great gains” of 2017.

As we charge into 2018, I will again forgo a firm “outlook”. Instead, I offer this simple assurance. Above all else, your team of investment professionals at Tufton Capital remains honored by your trust and committed to your interests. From all of us here at Tufton Capital, Happy New Year.

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The Fourth Quarter of 2017: Consistent Returns, Low Volatility

by Eric Schopf

The frigid weather that ushered in the New Year has been no match for the red hot stock market.  The Standard and Poor’s 500 delivered a total return of 6.6% for the fourth quarter and 21.8% for the year.   As many expected, the fourth quarter continued the trend of consistent returns with little volatility. Although technology stocks led the way with returns in excess of 38%, the rally was broad with most sectors posting double-digit returns.  This widespread improving economy, combined with low interest rates and benign inflation, continues to attract investors to the equity market.

Interest rates were once again on the move, with the Federal Reserve raising the Federal Funds rate to 1.5% in December.  This rate increase was the fifth since the Fed began tightening two years ago.  Despite the increases, interest rates are not yet attractive enough to entice investors to move out of stocks and into bonds.  Longer-term interest rates continue to be a challenge.  Although the Fed has raised the Fed Funds rate from .25% to 1.5% since the tightening cycle began in 2015, longer-term rates (maturities of 10 years or greater) have essentially remained unchanged.  Although the business cycle is approaching maturity, which would normally suggest some shift to bonds, we thus have little appetite for the longer-term instruments that offer returns that are just slightly higher than the rate of inflation.  Higher rates on the short-end are a welcome relief.  It is nice to actually earn something greater than zero on cash held in money market funds.

The major news headline in the quarter was tax reform.  The Tax Cut and Jobs Act was passed along party lines in late December and provides some tax relief for many individuals.  However, the lion’s share of the law was designed to reduce corporate taxes.  Although the corporate rate has been reduced to 21% from 35%, the impact will vary from company to company.  Legions of accountants are employed to minimize corporate taxes, so most corporations have not been taxed at the 35% level.  Nonetheless, extra cash generated through any tax savings may be deployed in a shareholder-friendly fashion. Investment in plant and equipment made to produce future earnings or reduce costs, share buybacks, and higher dividends are all potential uses of the extra cash.  President Trump and his administration expect the lower tax rate to help “make America great again” by attracting more business back to our shores from abroad and igniting economic growth.

US Treasury Yield Curve

While lower corporate taxes are a good thing, there is no such thing as a free lunch.  Unless spending is reduced or economic growth truly does generate enough incremental tax revenue to allow the tax cuts to be self-funding, the Treasury will need to issue a lot of debt to cover the expected expansion of our nation’s deficit.  The Congressional Budget Office estimates that the deficit will grow by $1 trillion over the next decade.  The issuance of debt to cover the deficit will come at a time when the Federal Reserve is winding down their balance sheet amassed during quantitative easing.  The end result will most likely be higher interest rates.

Low interest rates have not been the only pillar of the soon-to-be nine year old bull market. The  economy has improved, which has had a tremendous impact on the equity market. Gross domestic product grew in excess of 3% in the second and third quarters.  This is the first time our economy has grown at these rates for consecutive quarters since 2014.  Additionally, consumer confidence has bubbled higher.  Confidence hasn’t been this high since the dotcom era of 1997 to 2000, and it may further improve once individuals feel the impact of lower taxes. Corporate earnings growth has also provided a stable footing for the stock market.  Wall Street estimates going forward are strong, and the rebound in energy prices should drop to the bottom line for a wide range of companies that support the industry.

Our optimistic outlook for the near term reflects the mosaic of earnings growth, low inflation and interest rates, along with the continuation of a strengthening economy.  We temper our enthusiasm knowing that the business cycle is not extinct.  The five interest rate hikes initiated by the Federal Reserve have not put a damper on the economy.  However, with three or four more hikes potentially in the cards for this year, the impact may be more apparent.  We must also pay attention to the fact that the growth in share prices has been much greater than underlying earnings.  Stocks are just more expensive.  It is becoming increasingly difficult to find quality investments at reasonable prices.  Finally, consumers are very confident and are spending freely.  The U.S. savings rate has dipped below 3%,  the lowest levels since 2005 – 2007, prior to the Great Recession.

Soaring consumer confidence and dwindling personal saving leave little room for future improvement. It may seem that all these factors together suggest imminent recession. However, history has proven that these conditions may persist for many years.

Although we turn the calendar to a new year, our investment style and strategy remain consistent.  We continue to seek quality companies that are trading at temporarily depressed levels.  We place a premium on above-average dividends and sound balance sheets.  Portfolios are maintained within asset allocation guidelines spelled out in our clients’ investment policy statements.  This consistent and disciplined approach has served Tufton’s clients well over the numerous business cycles throughout our firm’s twenty-two year history.


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Company Spotlight: International Business Machines (Ticker: IBM)

by John Kernan

International Business Machines (IBM) reinvented itself before. Now it is looking to do it again. In the tech boom of the late 1990’s, IBM developed a technology services business that became the envy of all the other big tech names. Meanwhile, the company started to move away from the hardware businesses that defined it for a generation. Now, it seeks to make a new name for itself in the burgeoning field of artificial intelligence.

The impressive defeat of all human challengers on Jeopardy was remarkable for sure, but IBM’s powerhouse artificial intelligence system Watson is more than a quiz show smarty-pants (or smarty-motherboard, as the case may be). It is powering industry-specific solutions as the world’s businesses move to hosting their data on the cloud. Companies that have turned to Watson to solve problems in security, healthcare, and automation have seen productivity gains significantly beyond what human engineers could accomplish.

But the great-sounding story of Watson comes on the back of revenue numbers that came in under consensus in 14 of the last 20 quarters. Wall Street is waiting for evidence that IBM has truly turned a corner. As it does, we have stock that is yielding almost 4% and trading at attractive multiples. Technology is a fast-paced, quickly changing industry, and the timing of IBM’s turn is far from certain. But Big Blue has been investing in this change for years. Now we have a company with a strong balance sheet, good customer relations, and a history of success that has a solvable problem affecting the stock price – the value investor’s ideal.

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How The New Tax Plan Affects You

by Neill Peck

Just before Christmas, President Trump scored his first major legislative victory when he signed the Tax Cuts and Jobs Act.  The bill dramatically reworks the U.S. tax code and promises to immediately alter the financial lives of families across the economic spectrum.

The Tax Cuts and Jobs Act represents the largest one-time reduction in the corporate tax rate in U.S. history, lowering it from 35% to 21%. The 503-page bill also lowers taxes for a majority of American households, as well as for small business owners – at least until the personal tax cuts expire after eight years.  The bill lowers taxes for top income earners.  Prior to its passage, couples earning over $470,000 per year paid 39.6% in federal income taxes.  The GOP bill drops that rate down to 37% and increases the threshold at which that rate kicks in to $600,000 for married couples. This new break for millionaires is intended to ensure that wealthy earners in highly taxed states such as New York, Connecticut, and Maryland don’t end up paying substantially higher taxes. Moving forward, taxpayers will only be able to deduct $10,000 in state, local, and property taxes.

The final tax plan lowers taxes for most Americans until 2026, since it will decrease rates for every income level. Even though the personal exemption is being scrapped going forward, the plan nearly doubles the standard deduction.  It also doubles the child tax credit that parents receive to $2,000, and it increases the credit’s income threshold from $75,000 to $200,000. The bill also creates a new $500 temporary credit for non-child dependents (children 17 or older, a disabled adult child, or an ailing elderly parent).  Moving forward, the new plan lowers the cap on the mortgage interest deduction on a first or second home. Now, homeowners will only be allowed to deduct interest on the debt up to $750,000, down from $1 million today.  While early versions of the bill had proposed repealing deductions on medical expenses and student loan interest, these changes did not make it into the final version.

Republicans in Congress had originally wanted to do away with the estate tax entirely but ended up settling on increasing the taxable threshold from $5.5 million per person to $11 million.  Going forward, a wealthy couple will be able to pass $22 million on to their heirs tax free.  Small businesses are getting a big tax break under the new plan. Pass-through companies (LLCs, S corps, partnerships, etc.) will receive a 20% reduction under the new tax code.

Investors saving for retirement will not expect many changes under the new tax plan, since it makes no changes to the tax-free amounts they can put into 401(k)s, IRAs, and Roth IRAs.

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How The New Tax Code Affects Your Portfolio

by Ted Hart

The new tax plan promises to cut taxes for corporations. The companies in which we invest our clients’ funds have various options for the new-found savings.

As stated in the preceding article,  the corporate tax rate will be revised from 35% to 21% this year. On a global basis, the tax reduction takes the United States from the highest in the industrialized world to the middle of the pack – quite competitive for businesses in the world’s largest economy. One of the largest benefits that has flown under the radar is the provision that allows businesses to deduct the cost of their equipment immediately.  Previously, these companies were required to deduct the cost over a period of several years.

Despite the tax break, not all businesses will find the new plan beneficial. Companies will no longer be able to fully deduct their interest expenses on their debt. Instead, companies can deduct up to 30% of their EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) through 2021. Thereafter, companies will be able to deduct up to 30% of their EBIT (Earnings Before Interest and Taxes). This will ultimately hurt companies that carry a lot of debt and that have low profitability. Fortunately, a large majority of companies in our portfolios are highly profitable and have affordable amounts of debt.

What will the big multinational companies and other large U.S. businesses do with their tax savings? The answers have varied. AT&T has stated that it will increase its capital investments in the United States by $1 billion over the course of the next year. Additionally, it will provide a bonus of $1,000 to approximately 200,000 people. Boeing, the largest manufacturer of airplanes, says that it will make an additional $300 million in investments, with the idea of allocating one third of the investment to facility improvement, one third to employee training, and one third to corporate giving. In the banking sector, Wells Fargo and Fifth Third Bancorp both stated that their companies would increase their minimum wage to $15 per hour. Fifth Third also said they would reward some 3,000 employees with a $1,000 bonus.

In addition to capital investments and bonuses, many companies plan on additional share buybacks and dividend increases, which should drive investor returns higher. However, the lack of management voices claiming more capital investment implies that their production capacity is not that restrained. Furthermore, the prevalence of bonuses versus wage increases is also somewhat concerning. The lack of wage increases implies that the tax bill may not remain in effect if the Democrats gain control of the House and Senate in the 2018 Midterm Elections or if the Democrats win the White House in 2020. (Although the former is highly unlikely.) Overall, the tax overhaul should be positive for companies in our portfolios.

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“Stocks In The Future”: Investing in Students

Tufton Capital Management is pleased to announce our firm’s involvement with the Baltimore-based charitable organization “Stocks in the Future.”  This non-profit partners with schools in downtown Baltimore and provides a three-year financial literacy curriculum for middle school students in under-served communities.

“Stocks in the Future’s” mission is to develop highly motivated middle school students who are eager to learn and dedicated to attending class.  The financial literacy program introduces Baltimore City students to business concepts, expansion possibilities, reasons for taking a company public, and ways to compare company performance. As students progress through the program, they can earn money in an investment account by attending school regularly and improving their grades. Their money can be used to purchase shares in a publicly traded company.  When they graduate from high school, their hard work pays off, since they are able to keep the shares that they have purchased.

Tufton’s associates have been actively volunteering with the Program.  Our employees have taught middle school math classes and have worked with teachers to help them better understand the Program’s curriculum.

Tufton Capital is happy to support the “Stock in the Future” organization, and we believe its incentive-based curriculum can make a difference in students’ lives.

To learn more about “Stocks in the Future’s” mission, visit the organization’s website:

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The Tufton Viewpoint, Autumn 2017: Keeping Steady in an Unsteady World

by Chad Meyer

As the temperature finally drops, the landscape subtly shifts, and children everywhere resignedly dig out their real shoes and dust off their school uniforms, it’s difficult not to take pleasure in the perennial change that autumn brings. As anyone who has watched more seasons pass than they care to admit knows, this brand of change—the predictable kind—doesn’t really count as change at all. Instead, it represents a keeping of plans, and all the comforts that come with knowing the world is still spinning right on schedule.

Of course, in an autumn like this one, even the most optimistic among us could be forgiven for suspecting that there may be a different sort of change afoot—and that whatever “schedule” once reigned is now subject to revision with a few hours’ notice. As a glance at the evening news suggests, our country is plainly on the brink of a dramatic and unpredictable change on multiple fronts. From the hurricanes rocking our nation’s shores, to the political debates rocking our national dialogue, to the looming prospect of war with North Korea, stability appears to be a commodity that grows scarcer in America by the day.

Nor, it would seem, is the the financial sector bucking the trend. As hordes of market commentators (and, perhaps, your local cabbie) will eagerly attest, Bitcoin, Ethereum, and various other “crypto-currencies” may well be on the verge of sending dollar bills the way of the dodo bird. But even as the market’s enthusiasm for digital currency renders it the hottest asset class of the year, all the fervor has some experts crying foul. Bitcoin “is a fraud,” declared JPMorgan Chase CEO Jamie Dimon at a recent investor conference. “It’s just not a real thing.”

Finally, and perhaps most perplexingly, there’s the stock market itself, humming along nicely as the world around it rattles and shakes. In the third quarter of 2017, the Dow Jones, S&P500, and NASDAQ all rose by roughly 4% or more, with the latter index posting gains of nearly 6%. That level of performance and the low volatility that attended to it have, in some circles, given rise to the anxiety that the market is “ignoring” broader macroeconomic trends. Doesn’t the market see (so this brand of hand-wringing goes) all the change that’s lurking about?

Put simply, it does, but it also recalls that it has seen all this before. For the last two hundred years, while America has faced conflicts and crises of every ilk, at home and abroad, the U.S. stock market has quietly chugged along as one of the most reliable wealth creation vehicles in the history of mankind. And at the risk of seeming old-fashioned, we here at Tufton Capital tend to believe it’s going to keep chugging, no matter how the wind howls outside our door.

In a world that changes by the minute, we thank you for the opportunity to protect and grow your capital, and we remain honored by the trust you’ve placed in us.

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The Third Quarter of 2017: The Irrepressible Stock Market

by Eric Schopf

The third quarter gave us yet another solid advance in the stock market.  The Standard & Poor’s 500 delivered a total return of 4.5%, and for the year in full, the broad-market benchmark has delivered 14.3%.  Also keeping in line with the first half, the S&P saw little volatility in the quarter.  Wanting to give us at least a little excitement, the bond market gyrated throughout the past three months. However, by September 29, intermediate- and long-term interest rates closed essentially unchanged from June 30.  Short-term interest rates continued to move higher in reaction to Federal Reserve policy. And so, we march steadily upward.

The stock market’s lack of volatility is truly remarkable given the wide range of social, geopolitical, and meteorological events that punctuated the quarter.  The largest setbacks in the markets occurred in mid-August, when tensions with North Korea rose. Reports from the self-isolated nation revealed that it was examining an operational plan to strike areas around the United States’ territory of Guam with medium-to-long range strategic ballistic missiles, enough to rattle any market participant. Then, a week later, it was rumored that Gary Kohn, the Director of the National Economic Council and a chief economic advisor to President Trump, was considering resignation after the President failed to blame neo-Nazis for the Charlottesville, VA violence.  The resultant selloff was short-lived, though, and the stock market was within a few points of its all-time high by the end of the month.  The Category 5 forces of Harvey, Irma, Jose, and Maria only fueled the market’s advance. Investors looked past the short-term effects and saw that building reconstruction and automobile replacement will more than offset the temporary slowdown in economic activity.

Falling in line with the squadron of ho-hum, the interest rate backdrop changed little during the quarter.  Rates remain at historically low levels.  The Federal Reserve did announce plans to begin winding down their $4.3 trillion bond portfolio by letting bonds mature without reinvestment. This development didn’t raise rates, though, as the pace of contraction will initially be so slow as to be almost undetectable. Inflation is also keeping rates down below the Fed’s 2% target, despite a low unemployment rate of 4.3%.  Low unemployment rates belie the true state of the labor market, which is likely looser than we’d prefer, given the labor force participation rate.

Labor force participation, the ratio of payrolls to the working age population, is a clear indication that there is still slack in the work force (see chart).  The broader deflationary themes of an aging population (and thus, work force), globalization, and technological innovation continue to play a significant role in the disinflationary environment.  Low inflation undermines the Fed’s case for interest rate hikes.  Low interest rates in turn support higher stock valuations. Thus, we seem to be stuck with low inflation, low interest rates, and a richly-valued market.

Source: FactSet

We turn now from the “boring” market to the piece of modern America that seems more turbulent than it has ever been – politics. Washington’s focus has now shifted from the Affordable Care Act to tax reform. Potential changes in the tax code have replaced the Fed as the primary influence on interest rates for the balance of the year. If these reforms were both successfully passed and meaningful, they would be a major catalyst for the equity and credit markets.  The ultimate scope of reform will depend on Congress’ ability to compromise on change, something that has been rare of late to say the least.  The very idea of implementing a complex reform versus a simple tax cut gives some uncertainty to any such proposal. The more variables that are added to any plan, the less certain economic growth becomes. A tax reform cannot avoid adding many unknowns.

The current tax thinking goes like this. Seeking to reshape both tax structure and the U.S.’ prosperity, the heart of reform lies in reducing corporate tax rates.  Our statutory rate of 35% puts America at a competitive disadvantage with nearly all global peers.  So, the plan is to reduce corporate rates to a level that makes it economically feasible to keep jobs at home.  These additional jobs would lead to a greater collection of personal income taxes.  If the Administration’s math is to be believed, the larger take on personal income taxes will largely offset the loss of corporate taxes. Thus, a balance is achieved, and everyone is happy.

However, there is also discussion of lowering taxes on individuals.  Lowering personal taxes strains the Administration’s math, which to begin with is somewhat tenuous.  Many experts do not think that the taxes from the higher spending that are supposed to come on the back of greater growth will compensate for the proposed cuts in tax rates.  To help bring taxation and spending more into line, the elimination or reduction of tax deductions will be required.  This is the part that requires compromise and is so difficult, since no taxpayers want to give up their deductions. Furthermore, reductions in Federal spending have been absent from the conversation.

We have no doubt that the economy could benefit, at least in some small measure, from changes in the tax code or a tax cut.  There is little room for error though.  Should tax reform not generate the desired growth, the national debt will balloon (see chart).  A greater national debt at a time when the Federal Reserve is reducing their net holdings of Treasury securities will most likely push interest rates higher.  The Fed could always modify their strategy and slow the pace of balance sheet reduction.  Low rates have been the catalyst for the stock market for a long time.  The question is whether the economy and the stock market can support higher rates.

While Washington squabbles, the economy continues to churn upward in unimpressive but steady fashion.  Annual gross domestic product growth in the range of 1.5% – 3%, par for the course since the end of the Great Recession, appears to be the new normal.  However, accommodative monetary policy, gridlock in Washington, falling unemployment, and this slow but steady economic growth have provided a powerful foundation for stocks and bonds.  The trends are still in place but the sands are beginning to shift.

We are at an inflection point with Fed policy.  If the Fed raises interest rates, they would eventually become an economic headwind. But higher rates could also impact corporate profits in the near term, because higher rates would likely mean a stronger U.S. dollar. A stronger dollar makes corporations’ exports more expensive to foreign buyers, and thus less competitive.

Corporate profits have been aided by a dollar weakened by the Fed’s pivot to a slower monetary policy pace in 2017.  Also menacing are the classic late-cycle signs throughout the markets. Stock valuations are elevated, the yield curve has flattened, and balance sheets are more levered.  We remain cautiously optimistic but mindful of the environment as we work hard to grow and preserve your capital.

Source: FactSet

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Bulls Make Money, Bears Make Money, But Pigs Get Slaughtered

by Neill Peck

You may have heard this old Wall Street maxim that warns against greed and impatience, but have you followed it?  Without a doubt, the stock market can be an exciting place, and it’s easy to get roped into the allure of finding the next home run or timing a trade just right.  For instance, a friend at a cocktail party may tell you about the killing he made off that ABC trade, and you may think, heck, why can’t I do that?  Then there’s your inner trader who may get the best of you and get you thinking that you too can perfectly time your entry and exit points. If you have ever found yourself directing trades based on your emotions or you have attempted to time the market, are you really investing for the long haul? Or are you looking to make a quick buck?  At Tufton, we may even suggest that you are gambling (not investing) with your retirement savings.

Research has shown that investors are significantly better off by following the approach of “time in the market” rather than timing the market.  From 1998 until 2012, CXO Advisory Group ran a study to attempt to see if 28 self-described market timers could successfully time the market.  The overall results were not good.  They found that market experts accurately predicted the direction of the market only 48% of the time.  Only 10 of the 28 experts could accurately forecast equity returns more than 50% of the time, and not even one could outperform the S&P 500.  The evidence was so conclusive that CXO decided to stop tracking the statistics entirely! Unfortunately, sales skills triumph over investment skills on Wall Street from time to time, and often the loudest pundits get most of the attention.  If an investment strategy sounds too good to be true, it is.

Another caveat to deter you from timing the market is that, over time, it’s possible to underperform significantly by sitting on the sidelines.  Yes, it can be very costly to sit in cash. For instance, if you examine the chart below, you see that if you missed the top 12 months in the past 5, 10, 25, and 50 years, you would have underperformed the S&P 500 significantly in each scenario.

Even though a disciplined investment approach may sound like it’s old advice straight from your grandfather’s roll top desk, it’s an idea that has stood the test of time.  By staying the course and grinding it out over a long period, investors avoid the worst of which can happen and will happen over the years.  A disciplined approach to portfolio management keeps average investors from overreacting and hurting their long term positive return that we all need to retire well. It’s almost impossible to avoid the allure of “knocking it out of the park” with your investments. Just remember, as history has shown us, if you’re not careful, you may end up “getting slaughtered.”

Stay Invested (Please)Source: FactSet


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TJX Companies, Inc. (TJX)

by Scott Murphy

While the overall stock market has been rewarding for most investors in 2017, the same cannot be said for the retail sector. Amazon has become a “legendary and mythical beast” of sorts and has become the biggest competitive threat for every retailer, placing the stocks of traditional brick-and-mortar retailers on the sale rack. As value investors, we readily acknowledge the magnitude of change in retail but still believe there is a place in our portfolios for a traditional retailer like TJX Companies, Inc. (TJX).


TJX has a leading market position in the off-price retail market. They control 45% of the discount retail market and operate 3,800 stores under the brands TJ Maxx, Marshalls, HomeGoods, and HomeSense. In a tough and changing retail environment, TJX has been able to grow its same store sales for twenty one consecutive years. Simply put, they have proven they can grow sales and earnings through good and bad economic times. Many attribute this resilience to their customers’ “treasure hunting” experience.  At TJ Maxx, customers can arrive at the store not knowing exactly what they are looking for, and end up finding something they like at an irresistible price – a “treasure.”  This customer experience and incredibly low prices have largely allowed TJX to defend itself from the industry disruption caused by Amazon.


Therefore, we have begun to initiate positions in this well managed, industry leading discount retailer that has underperformed the market for two straight years. Our expectation is the market will realize they have misjudged the power of this off-price traditional retailer and will become buyers again, boosting the stock price in the process.


Source: FactSet

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The High Stakes of Low Volatility

by Ted Hart

As mentioned in our lead article, the S&P 500 is up 14.3% this year through the third quarter. With that gain, the market has witnessed the second-longest period without a 3% pullback since 1928. If this streak continues through October, the S&P 500 will set the record for longest such period. On top of that, the average range between daily highs and lows on the index is also hitting historical bottoms. Investors are attributing this low volatility to a number of factors, some of which include passive and quantitative investing strategies. In fact, many of these approaches might be providing investors competitive returns. However, all of them ignore company fundamentals and can often push stocks higher without any regard for how a company or an industry is performing. Money has poured into these strategies in the past few years. As volatility inevitably rises, these trades should begin to unwind.

Passive investing is the most basic form of this investment trend and simply involves investing money in a stock market index, such as the S&P 500. This strategy has rewarded investors over the course of the bull market, but despite having low fees, it still has a few flaws. To maintain the proportional stock weightings of a given index, the fund or ETF provider must buy shares in stocks that have increased, and sell shares in stocks that have decreased. This can lead to overvaluation of the companies that are consistently bought (think Netflix). In addition, because of the flows to passive investment vehicles, Goldman Sachs estimates that the average stock in the S&P 500 trades on fundamental news only 77% of the time, down from 95% ten years ago. When the markets eventually turn south and investors pull their money from these indexed products, the forced selling will likely create a cascade effect as index fund suppliers are forced to sell securities to meet investor redemptions.

Risk parity is another investment strategy that often ignores company fundamentals and feeds off low volatility. Risk parity investors make investments in a company, index, or asset class based on volatility. The strategy targets a specific volatility measure and will typically be buying securities as the volatility is declining and selling securities when volatility rises above the target. Recently, risk parity strategies have pointed to holding more stocks than bonds as the volatility of stocks has significantly declined. As volatility increases, the recent trends should flip as risk parity strategies begin selling stocks and proceed to buy bonds to “pare the risk.” Many investors believe that because risk parity strategies have grown, the forced selling could create a sharp selloff in stocks – possibly creating an opportunity for the patient investor.

While these strategies continue to push stocks higher and investors likely buy every dip in the market, market liquidity is also plentiful. As a result, buyers of stocks and ETFs are not having difficulty finding sellers and vice versa – sellers of stocks and ETFs are easily finding buyers. In fact, since the Federal Reserve started tracking the data, the M2 money supply (which includes checking accounts and mutual funds) as a percentage of nominal GDP has never been higher. The elevated levels of liquidity in the markets can be the result of many factors, including the Federal Reserve’s Quantitative Easing policy and low interest rates. QE, as it is known, took the Fed’s balance sheet from just under $1 trillion in 2009 to over $4 trillion today. Also adding to liquidity are additional flows into ETFs, particularly from the retail investor.

No matter what the cause of low volatility and rising markets, we at Tufton continue to search for new investment ideas and monitor our buy prices. As one investor said, “Investments are the only business where when things go on sale, everyone runs out of the store.” Whenever that happens, we will be right at the front door.

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The Tufton Viewpoint, Summer 2017: A Rising Tide Lifts All Boats

With the fireworks long faded, and the bunting stowed away, the high holiday of summer has come and gone. But if the party is over, a question now looms large. Who’s going to tell that to the American stock market?

For all the talk of stormy seas that preceded it, the story of 2017 has turned out to be one of decidedly smooth sailing. In the first six months of the year, both the Dow Jones Industrial Average and the S&P 500 rose by 9%, more than doubling their gains over the same period last year. Over on the NASDAQ, where high-technology (and high-publicity) business models reign supreme, the good fortune rolled in even faster. Up 15% since the year began, the index is on track to turn in its best year in nearly a decade. A few weeks back, while all three indices breached or skirted all-time highs, the VIX—which measures fear in the market—approached a 20- year low. Just like those 4th of July fireworks, the year has certainly begun with a “bang.”


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The Second Quarter of 2017: Steady As She Goes

by Eric Schopf

The stock market continued to march higher in the second quarter. A solid 4% total return in the second quarter of the year brings performance for the first half of 2017 to around 9%.  On June 19, the Standard & Poor’s 500 reached an all-time high of 2,453.  The Dow Jones Industrial Average and the NASDAQ markets also hit record highs during the quarter.  This strong performance has been accompanied by very low volatility.  For example, the stock market fell for three consecutive days just twice during the quarter.  Another positive mark was that the largest one-day drop in the S&P 500 during the quarter was 1.82% on May 17, which more than recovered in the five trading days that followed.  The lack of volatility in the stock market reflects the placid, stable U.S. economy.  This year will mark the eighth consecutive year of economic growth falling in a tight range of 1.5% – 2.5%.

On the other side of the fence, the bond market marched to the beat of a different drum during the quarter.  Short-term interest rates moved higher in reaction to Federal Reserve policy, but intermediate- and long-term rates moved significantly lower.  The yield on 10-year U.S. Treasuries touched 2.14%, approaching levels that prevailed in December 2015, prior to the start of the Fed’s tightening cycle.  Lower long-term rates cast doubt over anticipated future economic growth and the inflationary pressures that typically accompany such growth.


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Diversification: Investing’s “Free Lunch”

by John Kernan

Diversifying a portfolio is a relatively simple concept. If you have more securities and one goes bad, it won’t sink your whole ship. Diversification is often called investing’s “free lunch” for good reason.  You get the benefit of lower risk with little extra cost to you as the investor.

Proper diversification isn’t always as straightforward, and investors can get themselves into a mess while thinking they’re doing the right thing by holding lots of funds. For example, any investor choosing a mix of assets has certainly heard of diversification, but while looking at a menu of 50+ mutual funds, how to diversify might not be so clear. He or she might “wisely” choose several funds that look to be different. Looking at Vanguard’s “Stock Funds” menu, it would be easy to pick the following list of funds: (more…)

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Company Spotlight: Bristol-Myers Squibb (Ticker: BMY)

by Barbara Rishel

Bristol-Myers Squibb (Ticker: BMY) is a leading biopharmaceutical company that discovers, develops, manufactures, and distributes products worldwide.  Squibb was founded in 1858 and Bristol-Myers Corporation was founded in 1887, and the two came together a hundred years later in 1989 to form BMY.  Today, the company generates annual revenues of $20 billion.

BMY’s product line serves several important therapeutic areas, but most important to Bristol is its oncology business.  Within oncology, investors’ hopes focus on Bristol’s drug Nivolumab, marketed as Opdivo. Opdivo works as a checkpoint inhibitor, using the patient’s own immune system to combat cancer.  Immune checkpoint science has been progressing in the fight against cancer for almost twenty years, but Opdivo only received FDA approval for the treatment of melanoma in 2014, making it a cutting-edge treatment.  The drug is undergoing further testing in combination with other drugs to improve outcomes and expand the addressable market.


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