Chance Finucane – Oxbow Advisors

Playing Offense & Defense at the Same Time in the Stock Market – July 7, 2020

Hi, I’m Chance Finucane Chief Investment Officer at Oxbow Advisors. Investors often ask us, “Is now the time I should be more aggressively positioned in my portfolio? Or maybe I should be more defensively positioned?”

In Europe, the Liverpool soccer team is now the reigning champion of the two most prestigious leagues in the sport and their coach did it by instilling a mentality in his players to always be thinking about offense and defense at the same time. We think our stock portfolios have benefited from a similar philosophy and the past five months act as a good example in our Long-Term Growth portfolio.

There are nine companies that we think fit this profile of playing offense and defense. Let’s look at defense first.  From February 19th to March 23rd, the S&P 500 declined by -34% but these nine stocks declined by less. We think there are three reasons behind this. The first two work together. They are low debt and high free cash flow margins. What those do is it limits the risk of bankruptcy during a recession. So if you’re an investor in these companies, you don’t have to worry about that worst-case scenario like you would if you are invested in an airline or a cruise line.

The other reason is that most of these companies either generate a high amount of recurring revenue, like subscription revenue, or they’re benefiting from a positive long-term trend in their industry. So in a recession, there’s less risk of having a major decline in revenue for one of these companies because their customers have to keep ordering their products or services.

Next we’ll look at offense. Once you get past the major decline the S&P 500 has rallied by 41% from March 23 to July 2nd, but these companies have done even better. There are a couple more components that we think are factors here. The first is every one of these companies is either dominant in its industry or at the very least has the number one market share in an attractive industry. So in an adverse environment, they’re able to out-compete their peers and emerge even stronger once you get out of a recession and get back to normal conditions. The other reason is that most of these are high growth businesses. Six of the nine companies on this chart are generating revenue growth of at least 10% a year. So when investors calm down after a panic-driven decline and they start thinking about growth again, these companies are still going to be on their list. You combine these two periods together and the result is an average return of 16% for these nine stocks, which is twenty-three percentage points ahead of the S&P 500’s -7% decline over the same four and a half months. Currently nearly 40 percent of the stocks in our Long-Term Growth portfolio fit this profile of being able to play offense and defense. We can see that percentage increasing over time, especially since the current, highly uncertain conditions don’t seem like they’re going to go away any time soon. We like the idea of owning more companies in the portfolio that we think can be owned indefinitely rather than focusing on purely cyclical or defensive companies that we have to time our way into and out of the positions, depending on where we are in the market cycle. With more holdings that we think can thrive in both an offensive and defensive environment, we think we are prepared to do well regardless of the next development in the economy. If you have any questions, please contact us.