Two primary trends persisted last month: cyclical companies continued to outperform and earnings reports surprised on the upside. The Energy, Financial, Industrial, and Material sectors charged ahead after lagging in 2020. We believe that because 2021 earnings projections are underestimated, valuation measures are perceived as overestimated. Corporate America has reduced its cost structure, and modest revenue increases will lead to higher earnings and cash flow. As the economy rebounds, we expect accelerating revenues and solid margin improvement to lead to even better earnings reports.
MCM Growth Strategy – Industrials were led by Gentherm, Rexnord, and NV5 Global. Financially oriented companies like S&P Global, MasterCard, Visa, and PayPal rebounded as investors returned focus to companies benefiting from the reopening of economies. Several of last year’s outperformers have given up ground even as their business remains in growth mode, including Amazon, Costco, Thermo-Fisher, Apple, and Qualcomm.
Purchases and Sales – Construction Partners Inc., a Southeast roadway construction and maintenance company, was the only new addition. The company will benefit from an upcoming infrastructure package. We reduced healthcare, eliminating the Stryker position, in favor of more cyclically oriented companies. We modestly increased our Alphabet (Google) position as the company is seeing increased advertising spend.
MCM Value Strategy – Financials rose sharply alongside modestly rising interest rates and improving loan quality, led by Goldman Sachs, American Express, and Bank of America. Caterpillar, Disney, Boeing, and Martin Marietta led cyclically oriented shares while rising oil prices helped Chevron outperform. We expect value-oriented companies to keep their newfound leadership role.
Purchases and Sales – We continued to add cyclical companies like Boeing and Sysco (restaurant distribution). We reduced Pepsico, Verizon, and Duke Energy, all of which are solid companies but will most likely underperform as the market shifts to economic growth.
MCM International Strategy – International financial companies also rose alongside material and industrial companies. Clean energy was a detractor last month. Investor sentiment shifted to oil and gas companies and away from renewable sources. Wind, solar, and biodiesel fuel all retreated. Chinese companies retreated after last month’s solid gains. Some economists expect China to reduce stimulus later this year as the Chinese economy is growing strongly.
Purchases and Sales – There were no new purchases or sales in February.