July 2022 Research Update
Digital Department

Downward volatility in the capital markets can be scary. However, beyond the fear, volatility creates opportunity. When markets are in distress, investors are given the chance to own great assets at great prices. Like any other market, the best time to go shopping is when there is a sale. But being greedy when others are fearful is much easier said than done.

Our team has been hard at work strategically positioning our portfolio during this downward volatility. From your perspective, our portfolio transactions might not seem much different than normal, so we wanted to take a moment to specifically describe the actions we have taken to shape the portfolio for the current environment.

As valuations have moved lower, we’ve taken the opportunity to add to some of our highest conviction holdings where valuations have been elevated over the last few years. Specifically, we’ve added to secular growth stories such as Zoetis (ZTS) in animal health, as well as SiteOne (SITE), a company rolling up the landscape supply industry. While elevated valuations led us to trim our positions in these holdings over the last couple of years, we are excited that the market has given us this opportunity to again increase our exposure to these fine companies.

Most companies that we research do not materialize into investments immediately. However, there are a number that pass our criteria as “Sandhill” types of businesses that we would love to own at the right price. These companies end up on our Radar List which we continually monitor. Some Radar List companies may be monitored for years before we initiate a position, while most we never buy. The current market downturn, however, has presented us an opportunity to finally purchase a handful of Radar List names. In our Concentrated Equity Alpha product, we initiated positions in John Bean Technologies (JBT), Littelfuse (LFUS), Intuitive Surgical (ISRG) and Illumina (ILMN). In our Large Cap Yield product, we purchased NIKE (NKE) and Blackrock (BLK).

While we are always very conscious of our portfolio companies’ leverage, in a time of increasing economic uncertainty, we reduced exposure to companies that carry higher levels of debt and added exposure to businesses with much healthier balance sheets. We sold Clarivate (CLVT) and TransUnion (TRU) as both companies were taking on more debt to make acquisitions. In turn, we added exposure to ZTS, SITE, LFUS, ISRG, and ILMN. All of these businesses have very strong balance sheets. We believe these upgrades will serve the portfolio well regardless of the direction of the economy over the coming years.

One last point – while it’s important to understand what we have already done, equally important is what we have yet to do. Bear markets like this require investor patience. Bear market rallies, or short-lived uptrends in a larger downtrend, are quite normal and can be mentally taxing on investors. With our eye on both future returns and risk mitigation, we remain disciplined on price targets and careful with our capital allocation. We are mindful that there is likely further volatility ahead, but we welcome the opportunity to use it to our advantage.

 

Best Regards,
The Sandhill Research Team

 

 

 

Disclosure: This has been prepared for informational purposes only and does not constitute, either explicitly or implicitly, any provision of services or products by Sandhill Investment Management. Sandhill Investment Management (“Sandhill”) is a registered investment advisor with the Securities and Exchange Commission that is not affiliated with any parent company.  Third-party information in this report has been obtained from sources believed to be accurate; however, Sandhill makes no guarantee as to the accuracy or completeness of the information. All statements made regarding companies, securities or other financial information contained in the content are strictly the beliefs and opinions of Sandhill and are not endorsements of any company or security or recommendations to buy or sell any security. Holdings discussed are part of our Concentrated Equity Alpha (“CEA”) and Large Cap Yield (“LCY”) investment strategies. These investment strategies have the potential for profit or loss. For a full list of strategy recommendations for the preceding year, please email your request to compliance@sandhill-im.com.

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