Q2 2024 Review: Sometimes the Market Just Doesn’t Care

Sometimes the market just doesn’t care. All the air gets sucked up by a mega trend, and everything else gets overshadowed. Investors can chase the trend, or they can focus on the opportunities hiding in the shadows. 

Air Products & Chemicals is the third largest industrial gas company in the world, supplying hydrogen, oxygen and nitrogen, among other gases, to a variety of global industries. Most of their revenue is tied to long-term contracts that lock in demand for years, generating predictable growth. There’s no other company in the world making the large-scale investments into industrial gases, and we love the potential returns, but the stock is down 5% this year.

Constellation Brands, the owner of Corona and Modelo beers, Kim Crawford and Meiomi wines and High West Whiskey, reported their 57th consecutive quarter of growth in beer sales. They expect that business to grow between 7-9% this year, while driving margins higher. Although wine and spirits are in a slump across the industry, it makes up less than 20% of Constellation’s sales. Despite the prospect of 10% earnings growth, and the lowest valuation in a decade, the stock is up a modest 6%.

Option Care Health provides infusion and home care management solutions for acute and chronic medical conditions. Hospital care has the highest cost inflation of any sector in the past 20 years, so payers are incentivized to shift treatment to outpatient settings. JP Morgan estimates that the infusion market is about $100bn/yr, growing at 5-7%, and that home infusion makes up 15-20% of the total market. Of that, Option Care is 25% and growing revenue at almost 10% per year. A well-managed company, that is growing market share in a growing market watched its stock drop 17%.

Meanwhile, the consumer no longer likes popular athletic clothing brands as Nike (-30%) and Lululemon (-40%) got slaughtered. And they are no longer willing to buy happy meals at McDonalds (-14%) or overpriced coffee at Starbucks (-18%). They don’t even want to go to Home Depot and work on their remodel or their garden (0%). 

Crude oil is 16% higher, but don’t tell the energy stocks, with EOG Resources and Chevron up only 4%. Even with free cash flow yields over 7%, strong and resilient balance sheets, and continued growth in global crude demand, the market just doesn’t care.

The market does care about some things. CITIGROUP (+25%) and Fidelity National Information Services (+26%) are making great strides in their respective turnarounds. Walmart (+29%) and TJ Maxx (+15%) continue to prove they can compete with Amazon. Sadly, Raytheon’s missiles are in high demand around the world (+20%).

And of course, there is AI. We weren’t smart enough to load up on Nvidia (+149%), but we do have exposure through Applied Materials (+46%), Broadcom (+44%), and Tawain Semiconductors (+68%). These stocks may not have us grooving on the dance floor but at least got us into the party.  

That party has gotten so crazy that only 6 companies, Nvidia, Microsoft, Amazon, Meta, Google, and Apple accounted for ~60% of the S&P 500’s 15% increase. Nvidia alone accounted for nearly 30%! 

For many investors this creates a dilemma. To keep up with an index this concentrated you are forced to own these giant tech companies, and you must own a lot of them. This requires you to believe that the recent AI excitement and investment cycle will keep the party going for big tech for a long time. It leaves little room for the possibility of the recent incarnation of AI taking longer to become an actual product or leading to new technologies that disrupt the old guard. As the old adage goes, nobody ever got fired for buying IBM. 

Alternatively, an investor could recognize that there’s a lot of other great secular trends and wonderful businesses participating in them. Certainly, there must be opportunity amongst the other 494 companies in the S&P 500, or the 2,800 stocks on the NYSE or the 3,700 on the NASDAQ. Not to mention the companies listed abroad.

With everybody so focused on only a few companies, it’s likely that the potential for greater returns exists in the broader universe, and not in the “easy” money being made in just a few large cap growth tech companies.

But right now, nobody cares. Through the first 6 months of the year, the average S&P 500 company is up 4%.  Medium sized companies are up about 5%, and small companies are down 1%. All other indices are seriously lagging the S&P 500 and the Nasdaq 100. 

We could capitulate, and jump onto the AI train, and hope and pray we can get off before the party ends. But we know better. We’ve experienced these momentum, FOMO driven cycles, a handful of times in our careers and it has always been the case that straying from the crowd, focusing on value and valuation, and waiting for the market to care has proven the most effective way to grow and protect our clients’ money. We own a lot of great companies in our portfolios and if history is any guide, the market will eventually care. 

_{Compass Wealth Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.}