Wednesday, October 09, 2013

Government Shutdown & Default Fears Could Create Opportunity

Portfolio Changes

The strong bull market over the past 5 years has driven a handful of our companies’ valuations to fair or even over-valued in our statistical models. These stocks have done very well for our clients, however, there is a time to take profits and we believe that time is now for some of these companies. As a result, we are in the process of selling a few positions in favor of stocks with better long-term outlooks.

Reviewing our companies and rotating out of underperforming stocks into those we feel have better prospects for our clients is standard operating procedure for us. However, our plan for when we re-invest the cash raised from these sales is not.

Holding for Opportunities

Our investment strategy at Donaldson Capital Management has 3 priorities: security, income and growth. The most important priority being preserving investment capital for our clients. As a result, we will be holding onto the cash raised in sales for a bit longer than we normally would.

We have identified several quality stocks that our models currently indicate are undervalued. In the event that the market pulls back on Government default fears, we will have 10-15% cash available to buy great companies at more attractive prices if opportunities arise.

Long-Term Market Prices Moving Higher

As we said in last week’s Take Aways, we believe any negative market impact from the political stalemate and potential default will be relatively short-lived. We still believe that to be true. At the end of the day, the Government shutdown does not eliminate peoples’ need to brush their teeth or drive their vehicles. People are still going to wake up in the morning and go about their business. Every day, people all over the world are using the products our companies make. That is not going to change.

Fundamentals are still very strong with improving earnings and revenue outlooks for 2014 and 2015. Our regression models show overall stock market prices to be undervalued relative to historical fundamentals. The uncertainties in Washington D.C. will drive the Federal Reserve towards continued economic stimulation. All of these things are positive for stocks. In the long-run, we expect the markets to be heading higher. Any pause or sell-off in the market could be a good opportunity to get on board.