To Our Investors and Friends,
The S&P 500 finished the month of May down 6.6%, paring back its gain for the year to 9.8%. Oil prices (WTI) fell 16.3% to just over $53 a barrel, driven by more signs of a global slowdown. The 10-year Treasury Bond dropped 38 basis points in the month and is now down 55 basis points to 2.13% since the beginning of the year. The spread between the 2- and 10-year remained at 19 bps, but the short end of the yield curve has become more severely inverted. This severe reaction across markets is directly related to escalating trade tensions between the US and China. Last week, the Trump Administration increased market concerns by threatening major tariffs on Mexican imports. This economic action on our largest trading partner designed to force Mexico to implement stronger border security may drive our industrial economy into recession. The market is beginning to price this in. The Russell 2000 Value index performed the worst, down 8.2% for the month. The other major indexes faired poorly as well – the Russell 2000 Growth fell 7.4%, the Russell 1000 Value dropped 6.4%, and the Russell 1000 Growth declined 6.3%.
We know that investors have entered a period of heightened anxiety, but what happens if this spills over to Corporate America? Over the last 30,000 years, humans have dramatically advanced technology across all facets of life. Despite all that innovation, at the heart of it, our DNA and our primal instincts have not evolved. As a result, we are subject to primal fears that often leads to both a resistance to change and poor decision making. We decided to see if empowered employees – those that have a sense of purpose instilled by their leaders - are having a positive impact on their company’s stock performance. We compared the Glassdoor ratings that employees give their employers on all S&P 500 companies, and then determined if there was a correlation between ratings and stock performance. Intuitive Surgical received the highest rating of all companies, where 96% of employees recommend the company to their friends, and the average employee gave the company a rating of 4.6 out of 5 (92 out of 100). The lowest rated companies were collectively the railroads, where only 28% of employees recommended the companies to their friends, and the average employee gave their companies a ranking of 2.4 out of 5 (48 out of 100).
As can be seen in the Chart below, only those companies most highly ranked by their employees experienced a noticeable impact on their stock prices over the last five years. This shouldn’t be surprising because according to the September 2017 issue of Inc. magazine, only 32% of employees are engaged. Wikipedia defines an “engaged employee” as one who is enthusiastic about his or her work, and acts in a way that benefits the organization’s business. A disengaged employee often is one that does the minimum amount of work for his or her company, and sometimes seeks to damage the business. We believe these behaviors intensify during periods of uncertainty. We believe in the power of engaged employees, and think that they will help their companies perform better as businesses, and as stocks, over the long term.
Source: Glassdoor - Company rating number is the best of 5 and was adjusted to fit the chart.
Kingsland Growth Advisor’s lead strategy, the Long-Term Growth strategy, just completed its first full year since inception. The strategy seeks to identify and own the next generation blue chip companies, those businesses that have the ability to grow 500-1000% over the next ten years. The stock selection process we employ to successfully identify such companies is the result of 25 years of growth investing in the best opportunities available to the public markets. It has been a fantastic start. The strategy is up 17.7% in this tumultuous year, and compares favorably to the Russell 2000 Small Cap Growth index, which declined 6.9% over the same time frame. In a world in which both luck and skill will always play a part, we believe this start should provide some confidence that stock-picking skill is a big factor in this strategy. We welcome you to contact us to learn more about how we search for great growth companies that will emerge from the Fourth Industrial Revolution.
All the Best to You,
AKW