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Just follow the money… right to the top line December 2009- Market Outlook Consider the dramatic shift. Last year we were rewarded for a shift towards financial stocks with simple business models, which contributed to the -9% return in our long-only, financial stock portfolio. This year the market rewarded holders of financial stocks that were badly hurt last year by capital concerns, but have now doubled from lows as these concerns abate. Looking ahead, as the shift back towards fundamental valuation unfolds (vs. valuation based on fear) investors should be rewarded for holding financial stocks with strong top line growth potential. High Yield vs. Equities Capital Concerns: The blue line in the chart shows debt yields have retreated to pre-Lehman levels, which is a strong indication the market no longer extracts the same risk premium needed to compensate investors for capital concerns. What is interesting is that uncertainty remains for potential loan loss provisions faced by banks, yet the restoration of capital markets to address capital shortfalls seems to have trumped this pesky uncertainty. Top Lines Still Stuck: The red line shows that equity markets still have not rebounded to pre-Lehman levels. Our take is that the initial rally in equity markets (at least financial stocks) reflects comfort with capital, but a further rally will reward top line growth— not earnings growth attributed to one-time accounting adjustments, but good ol’ top line growth, such as increases in insurance premiums from the sale of more product. Headlines vs. Reality: Our most recent portfolio manager presentation, which we go through in meetings with prospective investors, shows a breakdown of the products included in the notorious “pricing cycle” often quoted in headlines. We then pull specific product pricing data from a sample company’s 10-Q that shows price increases, rather than declines cited in the pricing cycle data. The explanation for the difference is that data from many companies is aggregated in the single pricing cycle figure — most companies certainly show price declines, however a bit of digging uncovers true examples of top line growth, despite what headlines lead you to believe. If you have questions regarding the financial services sector, or would like to discuss our investment approach, please contact us at the phone number below, or visit our website. (www.PhiloSmith.com) E. Stewart Johnson PHILOSMITH Financial Centre Performance Year-over-year through November 30th, 2009 |
PSCO PARTNERS LIMITED PARTNERSHIPPSCO Partners specializes in the stocks of insurance and other financial institutions. It is not a trading vehicle and is best suited for long-term investment. The account's investment objective is above-average capital appreciation. Long-Term Performance of PSCO Partners: An investment of $10,000 made in 1975 and accumulated at the annual percentage change in the value of the partnership would have amounted to $1,491,722 at December 31, 2008, exceeding the rise in the S&P 500 by 9.62 percentage points annually during the same time period. Investment Policies and Practices: The portfolio is managed aggressively, and tends to be concentrated in companies in which market or industry conditions incite favorable change. Philo Smith & Co. is sensitive to the internal dynamics of organizations. The firm believes that the dynamics of each company, at any given time, are in constant flux. Our goal is to invest in companies in which those dynamics are developing in a positive direction. |
