To Our Investors and Friends,
The S&P 500 finished the month of April up 3.9%, reaching an all-time new high for the market, slightly above the previous high achieved last September. Oil prices (WTI) increased 7.7% to just under $64 a barrel, but remains far below the old September high of almost $77 a barrel. The 10-year Treasury Bond advanced early in the month and then retraced a majority of the gains, finishing the month at 2.48%, a 9-basis point advance. The spread between the 2- and 10-year widened 5 bps to 19 bps and continues to be modestly inverted at the short end of the curve. This has been an issue for the market all year, but does not appear to be indicative of a recession any time soon. The new economy, represented by the Russell 1000 Growth and Russell 2000 Growth indexes, continued to perform well, although small cap is now beginning to lag its larger peers. For the month, the Russell 1000 Growth advanced 4.5%, and the Russell 2000 Growth increased a more modest 3.1%. Both indexes remain about 5% ahead of the comparable value indexes, and are also up about 21% YTD.
Over the last decade, the largest businesses in the United States have experienced a great divergence in their fortunes foretold by decisions in one key area…future investments. We believe the most important decisions leadership can make is where to invest in its people and capabilities. These decisions take courage, intelligence, and an open mind to future possibilities. Cost-cutting decisions, on the other hand, are inherently short term in nature, and therefore require far less strategic thought. We believe Corporate America is beginning to feel the effects of years of serial cost cutting. Notable examples are General Electric and The Kraft Heinz Company – and more dominoes will fall as cost-cutting induced devastation is revealed in the coming years. Ten years ago, most companies were faced with a choice: invest in the future, or cut costs to preserve some semblance of the past. Fast forward to today, and those companies that invested during the downturn are a lot larger with much greater growth prospects, while the cost cutters have all but destroyed their cultures and with that, their futures. It is quite difficult to harness the energy of a great idea and make it a great business. It is impossible to re-energize a culture that has been subject to serial cost cutting, leaving it lifeless and purposeless. What do we do when faced with a potential investment in a serial cost-cutter? Run away!
Out with the Old and In with the New!
Initial Public Offerings (IPOs) have always been the lifeblood of Capitalism, and with them comes the hope of a better future. Unlike most previous periods, this year will be defined by the number of Venture Capital unicorns that go public -- those companies that have at least a billion-dollar market value before their IPO. Estimates suggest that over 100 “unicorns” are planning to raise more than $100 billion in proceeds for their IPOs in 2019, a number that exceeds the amount raised during the technology bubble years of 1999 and 2000. We believe that the number and quality of companies going public this year can help lift the economy and support further gains in the market. So far, it has been a bit of a mixed bag in terms of performance of IPOs. Lyft (LYFT) quickly sold off from its $72 IPO price, and is building a base around $60. Pinterest (PINS) was priced at $19 a share, and is up more than 60% in two weeks. Zoom Video Communication (ZM) priced at $36, and is now up more than 100% in the same two-week period. We did not buy any of these IPOs, as they all exceeded our initial market cap thresholds, but we are investigating them all. Over the next several years and months, the market will determine what these businesses are really worth, and over the next decade, we will find out if the market was right. Given the tremendous early volatility in these new issues, we will seek to take our time in first identifying the next generation blue chip companies, and then owning them.
All the Best to You,
AKW