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First Quarter 2021 in Review: Tables Turned

In the wider world, hope for a return to normal, or an even better new normal, is steadily gathering steam. There is light at the end of this pandemic tunnel, but the journey has been long and hard.

In financial markets, on the other hand, the pandemic setback was quickly absorbed. The stock market panicked in 2020's first quarter; if you need reminding, the S&P 500 dropped 34% from February 19 - March 23 last year. Then, with some combination of antiseptic coolness and stimulated optimism, the stock market quickly began to foretell a brighter future for the economy and company fundamentals. 

The 12 months following the March 2020 lows delivered sharp gains for stocks. As of the end of the first quarter of 2021, the S&P 500 sat 20% (including dividends) above its pre-pandemic high.   In our table of benchmark returns below, a look down the 12-month return column reveals eye-popping performance (ranging from 35% for real estate stocks to 95% for US small-cap stocks), an upward move that continued apace in the first quarter of 2021. 

Previously Out of Favor Investments Shine

 While stocks of nearly every stripe advanced, there was a notable change in what kinds of stocks drove the market higher. In our third quarter 2020 commentary (All In The FAAAM-ily), we highlighted how the stock market had increasingly cast its favor on a narrower and narrower set of gigantic technology companies. This was the predominant trend in the market for most of the last decade, culminating in the greatest degree of concentration in the S&P 500s top stocks in a long time.

In the first quarter of 2021 (and really since the November election), a much broader set of market segments is contributing to stock market performance, including many previously out-of-favor sectors. Most prominently for our portfolios, this includes value stocks and small-cap stocks, which tend to be more economically sensitive and are seen as relatively greater beneficiaries of the economic rebound (see more below). Other diversifying segments such as real estate and natural resource-related stocks also performed well in the first quarter. International stocks continued to lag US stocks.

Conversely, some pandemic winners fell in the quarter: Amazon, Apple, Tesla and Zoom Communications all declined in the quarter (shocking!).

The US Economy Is Unusually Strong Right Now

To help explain why the stock market is so positive right now, we must note the unusually strong current economic backdrop. The Atlanta Federal Reserve's GDPNow currently forecasts real (i.e., after inflation) US GDP growth at 8.5% for the first quarter of 2021. Standard & Poor's recently upgraded its full-year 2021 forecast for the US economy to 6.5%. To put this in context, there has only been one year in the last half-century (7.2% in 1984) when the economy grew faster.

There are several reasons for this. Obviously, it helps that the economy is rebounding from a weak 2020, when GDP contracted 3.5%. That 3.5% decline deserves some emphasis: amid our greatest health crisis in a century, with people stuck at home, businesses closed, travel sharply curtailed, curfews, protests, and everything else 2020 threw at us, it is remarkable that the broad US economy contracted just 3.5%. 

The very nature of the recession, with broad swaths of the population stuck at home for long periods, created a lot of pent-up demand for travel, eating out, going to the movies, discretionary health care procedures, and all sorts of other activities that had to be put on hold for much of 2020.

But the big element contributing to such a heated economic backdrop is the record amounts of government stimulus over the last 15 months, culminating in the just-passed $1.9 trillion American Rescue Plan. Many businesses, state and local governments, and consumers are exiting the pandemic with greater spending power than we have seen in a long time. Moody's estimates that globally, consumers have saved $5.4 trillion above and beyond 2019 levels. There is no doubt that many people are still suffering financially, but in aggregate, consumers have record amounts socked away and seem eager to spend.

A strong economy doesn't guarantee higher stock prices, but company fundamentals are likely to be quite strong this year and it's a favorable backdrop.

Bonds Lost Value in 1Q 2021

You will notice something weird in the Benchmark Returns table above. In the middle section labeled "Income & Preservation of Capital", the numbers for the first quarter were negative, a rare occurrence. The Barclays Aggregate Bond Index (sort of like the S&P 500 for bonds) fell 3.4% in the quarter. Bond prices move inversely to interest rates, and interest rates climbed during the quarter due to those rising expectations for the economy and the fear that such growth might trigger inflation. Let's put these figures in context.

Using the 10-year US Treasury rates as a benchmark, interest rates bottomed out at 0.52% on August 4th, 2020. From there, they rose to 0.93% at year-end 2020, and then increased further to 1.74% at the end of March 2021. The chart below shows the 10-year US Treasury rate for the last 15 months, capturing the steep drop in the spring and the rise since August.

It's important to keep perspective, though. The below chart shows current rates in the context of the last four decades.

We have tried to position the bond portion of your portfolios with a rising rate environment in mind by holding bonds (through mutual funds) of shorter duration than the bond index and less exposure to US Treasuries. From the current low-rate environment, we continue to see bonds offering minimal returns in the intermediate term, but they still play an important role in preserving capital.

Large Cap Value Portfolio Shined

(Not all clients of Bristlecone are invested in our Large Cap Value Equity portfolio strategy, depending on the size of the overall portfolio, and the client's objectives and constraints.)

The return to favor of value stocks shined through in the Large Cap Value Portfolio during the first quarter and extending to the last 12 months, with the LCV portfolio handily outpacing the S&P 500 return. Candidly though, after such a long period of being out of favor leading up to 2020, it will take several more periods like this one for value stocks to catch up and there remains a historically significant valuation gap between value and growth stocks.

In the quarter, we added to three portfolio holdings. We added twice during the quarter to our position in Qurate Retail common stock (we added a position in preferred shares issued by Qurate Retail in 4Q 2020). Qurate is one of many spinoffs from John Malone's Liberty universe of companies in which we have held shares over the last fifteen years or so. One of the largest positions in the portfolio, Liberty Broadband, is another.

Although Qurate may not ring a bell to many, you may be more familiar with the QVC and HSN (Home Shopping Network) shopping networks it owns, along with several other smaller online retail sites. Qurate specializes in what it calls video commerce, using live presenters to showcase curated collections of items for sale. This has been an enduring and highly profitable retail method that seems quite well suited to this age of social influencers and king video. Over the last five years or so, the investment story with Qurate's offerings has been that the decline of cable television (on which it was totally dependent 20 years ago) would lead to declining viewership and declining sales. 

The result was that Qurate's stock has often been valued more as a traditional retailer (like Macy's) rather than an online retailer (like Amazon). That binary view of potential outcomes is too simplistic, we think. Yes, Qurate faced headwinds from declining television viewership and it has had to be on top of its creative game to engage shoppers on new platforms. But it has largely been successful in doing so and seems to have been a modest beneficiary of pandemic behavior changes. Revenue was up 5% in 2020, and more than 60% of its sales come through e-commerce channels that are growing at faster rates. Importantly, Qurate has maintained a high level of profitability with margins that most retailers, online or traditional, would relish.

We also increased the weighting of our long-held position in Wells Fargo. Oh, how the mighty have fallen! We initiated our position in Wells Fargo back in 2008. The bank's business shined through the financial crisis, and the company for a while earned its reputation as the best large bank. The fake accounts scandal that came to light in 2013 did great damage to its reputation, especially with regulators, and the company paid an enormous price for its misdeeds, partly in the form of fines, but also in the form of regulatory restrictions that have limited the company's growth for a half-decade now. These restrictions remain in place, but with many changes made, including an entirely new management team, there does seem to be movement toward letting Wells Fargo out of the penalty box. While there, the stock has gone from being valued at a premium to the average bank, to being valued at a discount. We think the price dropped to a point where future returns look quite attractive.

Our other purchase in the quarter was Viatris, a spinoff from Pfizer. Simultaneous with the spinoff, Viatris merged with Mylan Pharmaceuticals to form the largest global supplier of generic prescription drugs. Selling generic drugs is an intensely competitive business. Still, we think Viatris will have the scale to compete profitably around the globe and develop its presence in adjacent markets like biosimilars and branded consumer health products that are more attractive. Viatris will need to reduce its debt burden to shift more value to the equity holders over time, but we are starting at such a low valuation point (we estimate our purchase price was below 8x this year's free cash flow).

The rapid recovery in stock prices over the last 12 months brings with it heightened concern that the market might be overvalued. While it is true that we find many stocks, comprising large chunks of the market, expensive for our taste amidst increasing signs of speculation, it is also true that we continue to be able to purchase stocks at attractive valuations. Our three additions this quarter are good cases in point. Compared to our assessment of current year cash earnings, Wells Fargo is the most "expensive" of the three, at about 11x earnings. Qurate and Viatris were purchased at lower multiples. We think these are levels from which holders can earn good returns over time.

To help fund these first-quarter purchases, and take advantage of higher trading levels, we trimmed our stakes in long-term holdings Valmont Industries and Weyerhauser.

Parting Thoughts

In our role as your financial advisors, we pride ourselves on having the right mixture of experience, knowledge, demeanor, service and communications skills to help you take advantage of all that financial markets have to offer in order to meet your goals. Investing for the long term can bring so many rewards. We know this last year has been difficult for you to navigate. Market gyrations always cause anxiety about the future. Yet without exception, all of our clients were able to navigate the last year without poorly-timed selling or harmful changes to investment plans that would have transformed temporary drops in value into more permanent portfolio impairments. For that, we are thankful.

With a moment to reflect now, while portfolios mostly sit at record high levels, it's a good time to exercise and develop that emotional muscle memory that allows you to tough out the difficult market environments so that you can enjoy the better times.

As always, thank you for your trust in our services. Please reach out with any questions you have or changes on your end that might affect your portfolio. 


Securities laws require Bristlecone to make available every year to clients the latest version of our disclosure brochure (Form ADV Part 2A). This form contains important information about our firm, such as services, business practices, potential conflicts of interest, a summary of our Disaster Recovery Plan, and Privacy Policy.

If you receive your 1st quarter statement by mail, a copy is included for your convenience. If you elected to receive your statements through our online portal, the disclosure brochure is available for download on the US Securities and Exchange Commission's Investment Adviser Public Disclosure website by clicking here, but we’ll be happy to mail you a copy free of charge (call 310-806-4141 or email clientservices@bristlecone-vp.com)

You may also find additional information about our firm at our website and through the same Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov. We are also required to adopt a code of ethics and provide a copy of which to clients upon request.

Please contact us immediately if you have had any changes in your investment objectives or financial circumstances. Any changes could impact how we manage your portfolio and will become part of your client file. You should also contact us at any time during the year if your investment goals and/or financial circumstances change. Should you hold equity securities in your portfolio, you will be responsible for the voting of proxies with regard to those investments. We typically do not vote client proxies unless specifically requested. 

One of Bristlecone Value Partners’ principles is to communicate frequently, openly, and honestly. We believe that our clients benefit from understanding our investment philosophy and process. Our views and opinions regarding investment prospects are "forward-looking statements," which may or may not be accurate over the long term. While we believe we have a reasonable basis for our appraisals, and we have confidence in our opinions, actual results may differ materially from those we anticipate. Information provided in this blog should not be considered as a recommendation to purchase or sell any particular security. You can identify forward-looking statements by words like "believe," "expect," "anticipate," or similar expressions when discussing particular portfolio holdings. We cannot assure future results and achievements. You should not place undue reliance on forward-looking statements, which speak only as of the date of the blog entry. We disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Our comments are intended to reflect trading activity in a mature, unrestricted portfolio and might not be representative of actual activity in all portfolios. Portfolio holdings are subject to change without notice. Current and future performance may be lower or higher than the performance quoted in this blog. 

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and returns do not reflect the deduction of advisory fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase.

Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there can be no assurance that a portfolio will match or outperform any particular index or benchmark. Past performance is not indicative of future results. All investment strategies have the potential for profit or loss; changes in investment strategies, contributions, or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client's investment portfolio.

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