CIO Update for Mairs & Power

CIO Update for Mairs & Power

May 13, 2020

Listen to Andy Adams, Chief Investment Officer, as he, on May 13, 2020, provided an update of on current economic and market conditions and their impact to Mairs & Power.

Executive Summary

We’re in a difficult environment. As states begin to lift the shelter-in-place restrictions, it’s likely that more people will be impacted by this.

The economic metrics we track at Mairs & Power are all down. Gross Domestic Product (GDP) in the first quarter was down about 4.8%. We expect to see GDP again decline in the second quarter, which will put the economy in the textbook definition of a recession. We also expect that these declines will continue in the third and fourth quarters before we see a rebound next year.

At this point, first-quarter S&P 500 earnings are down about 13.8%. Analysts anticipate that overall corporate earnings for the S&P 500 will be down about 40% in the second quarter and 20% for the entire year. We expect a fairly rapid snap-back in earnings in 2021. But that means we’ll have lost at least a year of earnings growth. Stock prices do follow earnings, so it is not surprising that the market has been down as much as it has been.

How We’re Responding

Despite the downturns in the economy and the market, we see do some attractive investment opportunities. That’s notably true in our Growth Fund, which has a typical quarterly turnover of 1% to 2%. In the first quarter, that jumped up to a little over 5%. The Growth Fund sold some of its positions in stocks that have held up well, such as Hormel, General Mills and Eli Lilly, while adding to companies with strong long-term prospects:

  • Microsoft - We think that work from home will accelerate the corporate move from on-premise computing to the cloud. This trend should boost Microsoft’s performance considerably in the long term.
  • Visa - When consumers begin to buy again, they’re likely to accelerate the current trend toward cashless transactions, such as tap-to-pay and mobile payments.
  • Activision - We added this videogame manufacturer in the first quarter. With people staying home more, they have more time to play videogames, which also provide them a way to stay in touch with friends.
  • Wells Fargo - The bank has been under pressure due to political and regulatory issues, as well as concerns about credit quality and consumers’ ability to pay off loans. But we believe it has the underwriting strength and the financial wherewithal to weather this storm.

Assessments

Promising news about COVID-19 has given us the confidence to make investment moves like these:

  • Shelter-in-place appears to be working. Growth in the number of COVID-19 cases had been exponential before it was instituted. More recently, that growth has stabilized to 25,000-30,000 new cases per day.
  • Vaccines and treatments being developed and researched are showing promise. One of those treatments is produced by Roche, a company we own. Developed to treat rheumatoid arthritis, Actembra has been found to help address the blood-clotting issue associated with severe COVID-19 cases.

Though we all are working remotely, Mairs & Power has been able to conduct regular company meetings, and our management teams remain in regular contact. Despite the stresses of the times, it has been business as usual for our firm and its investment managers.

 

Top 10 Fund Holdings (subject to change)

Mairs & Power Growth Fund 

Mairs & Power Balanced Fund 

Mairs & Power Small Cap Fund 

 

The statements and opinions expressed are those of the speakers and are as of the date of this call. All information is historical and not indicative of future results and subject to change.

Basis point refers to a unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1% or 0.01%.

Performance data quoted represents past performance and does not guarantee future results.