Our weighted average return in October was +1.5%, bringing our year-to-date net return to +15.68%.
Last month, equity markets traded up strongly and US corporate earnings continued to show impressive growth – most notably from the information technology (+22% EPS growth in Q3) and energy sectors (+156% EPS growth in Q3). According to Goldman Sachs “S&P 500 earnings grew by 7% in 3Q, the latest piece in a mosaic showing an extremely healthy operating environment for US corporates.” Furthermore, “S&P 500 earnings grew two percentage points faster than expected by consensus in 3Q. 51% of companies reported positive EPS surprises, in line with the first two quarters of 2017 and above the 15-year average of 47%.”
In our August commentary, we mentioned that the energy sector looked oversold. As such, we increased our energy exposure in September and benefited from the continued price recovery in energy stocks. Last month, we exited our energy plays (FANG US, XLE US) having made quick, but substantive double-digit profits. We anticipate that energy price volatility will continue to provide trading opportunities in the energy sector for the foreseeable future.
In our September commentary, we highlighted the sale of Shopify (our best performing investment) near its all-time highs. Thankfully, a short-seller media stunt based on unsubstantiated claims triggered a heavy sell-off in Shopify shares and we bought back in at attractive levels far below where we had sold.
Another highlight this month was Eurocastle Investment Limited (ECT NA). Eurocastle has made a fine business of buying Non-Performing Loan portfolios in Italy. In October, ECT announced a tender offer to buy back approximately 13% of their outstanding shares at a 6% premium to market prices. Share buybacks at a premium to market prices are a bit of an anomaly in capital markets, but ECT’s maneuver served as a strong confirmation of our investment thesis. To provide some extra context, we started buying shares of ECT on August 31st, 2016. This original position has generated a total return of 75%. Eurocastle is not a high-flying tech stock – just a very well run company that buys assets on the cheap and has the patience to reap excellent returns. This time management decided to deploy its discipline of buying undervalued assets on its own stock. Bravo!
Turning to global debt markets, October was a decidedly non-descript month – major international bond indices were pretty much flat. Global economic growth continues to put pressure on central banks to raise rates. This will be bad for bond prices, but it is clear that institutional investors are continuing to buy bonds at these levels quite simply because they have to. It will be interesting to see how these investors react when conservative bond portfolios begin showing consecutive months of mark-to-market losses.
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On the behalf our portfolio management team, I thank you for your continued trust and support!
FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.