Portfolio Strategy: Just Invest in Something

By Andrew D.W. Hill, CFA

As we reach the end of the 2nd quarter 2023, most client portfolios are fully invested, leaving little cash. There are short-term opportunities in fixed income with short-term U.S. Treasuries yielding over 5%, and longer-term bond yields are up significantly by investing in boring tax-free municipal bonds and high-quality corporates. For long-term growth, stocks offer the best potential return. With the SP500 breaking out of its bear market recently, led by 7 mega technology companies, there are several opportunities within the remaining 493 companies. Although, the short-term for stocks may be a bit bumpy as the gains year-to-date, are digested during the historically rough 3rd quarter.

Our outlook for the financial markets is for gains in stocks, while bonds may not move much from their current yields. Commodities may trend lower as oil demand is softening, while Russia is attempting to pump all it can and selling it at a discount. Agriculture commodities are trending lower as growing conditions are not as bad as feared. However, with hurricanes approaching early in the season, weather conditions can quickly change the supply of a commodity.

The SP500 Is Up 17% From the March Lows to The Recent Highs.
The Short-term Outlook Is for A Pullback.
Pessimistic Sentiment of Investors Makes Stocks Appealing Longer Term

Every position in a client’s portfolio has a role to play. Short-term bonds and funds are capturing high yields today, but long-term bonds and funds will benefit when interest rates decline, later this year. Equities, the asset class that is the most disliked by investors recently, are for long-term appreciation. Buying this asset class when unloved has been an extremely profitable strategy. Recent JP Morgan Asset Management data provides the data.


Our strategy for the near term is to keep the current allocation of stocks and bonds constant in most client portfolios although there may be some changes in the holdings. In bond positions, we continue to favor high grade issues, usually a credit rating with Standard & Poor’s of A or higher, to reduce economic risk. In some portfolios, we are holding Treasury bills, in others, we have the Leader High Quality Floating Rate fund or the Fidelity Conservative Bond Fund. The Federal Reserve is likely to keep short-term interest rates higher through 2024, but these two positions will capture the opportunity.

The core holding in most clients is individual bond issues with laddered maturities aligned with potential cash withdrawals. For taxable accounts, municipal tax-free bonds are boring, but effectively held. Also, many Munis have “insurance” to cover the payment of interest and principal in case the issuer cannot. Long-time clients will remember receiving above market tax free returns on defaulted Puerto Rician bonds when the insurer, Assured Guaranty, made the interest payments.

A portfolio’s long-term growth responsibility resides in equities. This year the SP500 is off to a strong start, up about 15% for the year so far. However, all gains are a result of 7 technology companies viewed as an Artificial Intelligence (“AI”) opportunity. During the month of June performance began to broaden beyond the top AI stocks. As a result, in June most clients’ equities began to outperform the SP500.

Currently the largest sector holdings are in technology with 28% of the average portfolio, which is in line with the SP500. The mega large tech stocks like Apple and Microsoft are now viewed as defensive or safety stocks such as drug companies, like how Procter & Gamble was viewed by investors in prior generations.

Specific to individual stock selection, although we consider over 40 factors, they can be categorized easily. First, we are biased to industry leaders who have significant technology which prevents competitors from capturing customers. Industry leaders are good corporate citizens as they invest in their brands and reputation. Over time, these qualitative factors result in superior financial metrics such as profit margins, return on investment, and growth of sales and earnings. These broad criteria have helped us produce strong performance while minimizing risk over time.

Across all client’s portfolios, U.S. Bank is the largest position and a new addition recently. U.S. Bank is the 5th largest bank based on assets according to Chat GPT. U.S. Bank’s stock declined from the $50’s to the low $30’s due to the bank failures this spring. The drop presents the opportunity to enter a position for this high-quality bank. AI favorites Apple and Microsoft are the top 2nd and 3rd holdings that produced excellent earnings reports in April 2023. With their strong gains year-to-date, it would be reasonable for a consolidation this summer.

Health care stocks have poorly performed this year due to concerns over long-term payments from the U.S. government. However, Vertex Pharmaceuticals moved higher by 10% in the quarter, while Thermo Fisher fell by 8%, as earnings fell from the Covid driven spike. The focus of Vertex remains on its results of two drugs- one for pain and one for sickle cell anemia, both currently in stage three clinical trials. Our top industrial stock is Cleveland based Lincoln Electric who combines high tech with traditional industrial welding. Its stock is at an all-time high up 14% during the second quarter.

Our top retail related holdings, Ulta Beauty and Amazon trended in opposite directions. Long time holding, Ulta was down 16% during the second quarter. Earnings outlook for the year was clouded by the growing impact of inventory theft. Unfortunately, this is a societal issue affecting several industries. Amazon was up 25% as the ease in purchases on their app is expected to grow forever. Also, their AWS cloud service announced AI tools for customers that would allow them to gain the benefits without the significant capital investment.

Other top holdings include Linde, the largest industrial gas provider in the world. Hydrogen is an energy source for large ships and motors, and it is progressing. Nvidia, the leading semiconductor company, is the leader in AI chips. We just wish we owned more as the stock has been one of the best performers this year.

Our energy holdings were mixed in the quarter. EQT, the largest natural gas producer in the U.S., was up 20% after natural gas prices bottomed out after falling dramatically this winter when the fears of Europe being frozen due to the lack of heating never materialized. Global warming does have its positive aspects. On the bad side, Oneok was down 7% due to an announcement of its acquisition of another pipeline company. While the deal makes financial sense in the long term, the cost, and headaches in attempting an acquisition with the Biden Administration was the primary factor in the weakness. Interestingly, both Oneok and EQT have very strong environmental reputations for safety and reducing methane gas emissions.

During the 2nd quarter 2023, we added a small position in Tesla, once again after harvesting a huge profit in 2022. As the electric vehicle (“EV”) is now recognized as the future in automotive technology, Tesla has numerous competitive advantages over its legacy competitors. Recently, CNBC interviewed the CEOs of Tesla and Ford at their manufacturing facilities. Ford had many employees while Tesla was highly automated with only a few employees. In the office library is a book that summarizes the competition; “Barbarians to Bureaucrats.” Tesla has a technological advantage, as its charging network will become the standard and labor advantage. The risk to owning Tesla shares is the non-existent governance and the potential large stock drop due to an Elon Musk issue.

Below are comments on two new holdings to the portfolio.
Large New Equity Holdings: U.S. Bancorp (USB), Toast, Inc. (TOST)
Best bargain in the bank stock dumpster
USB: U.S. Bancorp is a regional bank engaged in commercial banking, wealth management, and consumer banking with operations primarily on the west coast. USB has a strong reputation, stable financial performance, and diversified revenue streams. USB has efficient operations, and a strong balance sheet to protect its value. With the collapse of three major banks, most banks have lost significant value and there has been little differentiation between the strong from weak banks. We chose USB due to its strong financial condition as the first criteria. The 6% dividend yield, low valuation relative to its moderate growth potential coupled with significant purchases of USB shares by insiders gives characteristics of an opportunity for significant return potential.

Restaurants are finally upgrading their technology.
TOST: Have you been to a restaurant where the server has a device that allows you to tap and pay the bill? That may be a Toast product, but it is just the beginning of the product offerings that allows the restaurant to be operated by an iPhone. Toast, Inc operates as a software infrastructure platform that provides restaurants with various technological capabilities, including Point of Sale hardware, Online Payments, Digital Menus through QR codes, and more. TOST is challenging the status quo of the restaurant industry’s outdated technology and bringing a much-needed upgrade. The investment opportunity for TOST is long term appreciation as investors are attracted to the technology while reoccurring revenue is growing rapidly. While Toast is growing rapidly and appears to have a leadership position and recognized brand in the industry, it has not achieved sustained profitability yet, so it remains a modest size holding in most client accounts.


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Andrew Hill Investment Advisors, Inc. (“AHIA”) maintains a Business Continuity and Succession Plan (“BCP”) that has been developed with the goal of protecting the health and safety of our employees and maintaining continuity of service for our clients. Our Plan is designed to ensure that we are prepared to operate through significant business disruptions, so that our clients can access their accounts without significant interruption under most circumstances.
Key elements of our BCP include the following:

  • Critical data from our computer systems is backed up daily to geographically remote, secure facilities.
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If your account requires servicing during a significant business disruption and we are unable to assist you, please call Fidelity Investments at 1-800-523-1203 and a dedicated team member will be able to assist you. It is impossible for us to anticipate every potential problem that may occur, but we believe our BCP will enable us to conduct business in the event of a variety of possible business disruptions. We review and test our BCP at least annually and it is subject to modification based on changing circumstances and assessment of need.

As a fiduciary, AHIA has certain legal obligations, including the obligation to act in client’s best interest. AHIA seeks to avoid a disruption of service to clients in the event of an unforeseen loss of key personnel, due to disability or death. To that end, AHIA has entered into a succession agreement with The Colony Group, LLC, effective May 24, 2019. AHIA can provide additional information to any current or prospective client upon request to Andrew D.W. Hill, President at 239-777-3188 or [email protected].

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