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Auxier Report: Spring 2020

Mar 31, 2020

Download Auxier Report Spring 2020

Spring 2020 Market Commentary

 

In the first quarter we witnessed an unprecedented demand shock as many governments around the world instituted stay-at-home social distancing lockdowns to contain the exponentially spreading coronavirus pandemic. In addition to throwing millions out of work, the government mandated shutdowns have led to many supply-demand imbalances. Quality agricultural products are being wasted as demand is shut off from institutions and restaurants. The supply chains cannot adapt fast enough to get food to  homes, markets and food banks. Many industries, such as energy, are running out of storage leading to major gluts in supply and material price declines. This contributed to a forced liquidation in some highly indebted exchange traded funds (ETFs)–many utilizing over ten to one leverage. Between February 20 and March 23, the S&P 500 declined 35% and the Dow Jones Industrial Average lost 37%. Smaller stocks fared even worse, with the Russell 2000 losing over 40%. To compound the pain in the oil sector, a price war between Russia and Saudi Arabia broke out, adding millions of barrels of supply just as demand went into freefall. Before the outbreak, the travel sector was growing far faster than the general economy. Young and old cherished “experiences.” As many as 135 million Chinese tourists were visiting and spending in other countries. That stopped suddenly.

Financial innovations like exchange traded funds have grown in popularity because of the ease in trading, claims of liquidity and typically lower cost. However, during this correction the herd behavior, massive borrowing and illiquid underlying markets have accentuated the downturn. Walter Bagehot, editor of The Economist between 1860 and 1877, argued that financial panics occur when the “blind capital” of the public floods into unwise speculative investments.  Recently, the popular United States Oil Fund, LP (USO is an exchange traded fund organized as a limited partnership), was misperceived by retail investors as a lower risk play to buy oil but was actually a speculation in the futures market. The fund dropped over 70% in six weeks. Sound investing is about careful due diligence and knowing what you own. Pooled products can lack transparency and some operators have no “skin in the game.” You can’t have more liquidity than the underlying asset. Investment products can be very expensive if you don’t know what you own. There is no free lunch.

Over the last few quarters, the health insurance sector has been engulfed in pessimism due to the threat of socialized medicine. That risk has been diminished now that Bernie Sanders has dropped out of the race.  Companies like UnitedHealth Group, Cigna, CVS and Anthem were driven to bargain price levels due to the negative headlines.

In March, the Fed lowered its benchmark federal funds rate by 1% to a range of 0% to 0.25% which marked the fifth rate cut in the last 12 months. The continued rate cuts have hurt the profitability of both the banking and insurance sectors. Banks are likely to see interest revenue fall as a result. Bank of New York Mellon saw net interest revenue decline 3% during the quarter and their management does not expect the recessionary environment will fully recover until they get into 2021. The insurance sector has been similarly impacted as companies in this sector have substantial investments in interest-sensitive assets such as bonds. Another source of volatility in the market during the quarter was the ongoing global oil price war. In March, Brent Crude prices fell by nearly a third when Russia refused to cut their production. This caused the biggest drop in oil since 1991.  Challenging downturns like this emphasize the need for deep dives and daily research as we continue to look for companies with durable business models and balance sheets that may survive in both up and down markets.

Essential Businesses Provide Relief to the Job Market

COVID-19 has rocked the global economy as countries around the world enact social distancing or isolating policies to slow the spread of the virus. Many businesses have closed their doors and were forced to either lay off or furlough their workers resulting in record jobless claims of 3.28 million at the end of March. In the face of this economic shock, businesses selling necessities like CVS, Walmart, Kroger, PepsiCo and Amazon have seen a boost in traffic and are hiring thousands of new employees to meet increased demand. Kroger, for example, had hired more than 23,500 at the end of March and plans to hire an additional 20,000 for its stores, manufacturing plants and distribution centers. Walmart has hired 25,000 and plans to hire a total of 150,000 new workers by the end of May. Amazon plans to add 100,000 new full and part-time positions nationwide to support its delivery business. Companies like CVS have plans to hire workers who have been furloughed by other big companies like Hilton and Marriott.

Healthcare Companies Step Up to Fight COVID-19

With the novel coronavirus spreading all over the world, many healthcare companies have stepped in to help those who have been impacted. Companies like Johnson & Johnson and Gilead Sciences are working on treatments for the virus while Abbott Laboratories is working on a more efficient and effective method of testing. Johnson & Johnson is partnering with the US Department of Health and Human Services to fund over $1 billion in vaccine R&D. Management wants to begin human clinical trials by September with the first batches being made available for emergency use by early next year. Gilead (who introduced a cure for hepatitis C in 2014) is making great strides with antiviral drug Remdesivir. Abbott Laboratories will begin shipping a new coronavirus test kit that could make diagnosing COVID-19 as easy as diagnosing the flu. Abbott management stated that the test will be able to generate a positive result in 5 minutes and a negative result in 13 minutes. Faster and more effective testing could greatly improve efforts to slow the spread of the virus.  Johnson & Johnson, Gilead and Abbott ended the most recent fiscal year with free cash flow of $20 billion, $8.3 billion and $4.5 billion, respectively.

The Importance of Finding Enduring Businesses

Data from the US Commerce Department indicates that total retail sales from February to March were down 8.7%. This marked the biggest decline since 1992. One of the hardest hit sectors was clothing and accessories, where sales declined 50.5%. The best performing sector was food and beverage, with sales up 25.6%. Companies like PepsiCo saw increased sales as people stocked up on popular brands, especially snacks, in anticipation of stay-at-home orders.  According to our source from a large beverage distributor, for the first two weeks of the shutdown, every day was the equivalent of Thanksgiving and Christmas sales combined. Companies like Kroger and Walmart have seen robust demand in food and beverage retail. Kroger’s same-store sales grew 30% in March, up from the 2% sales growth in the fourth quarter. Walmart saw US sales grow nearly 20% in March. Since most of the population has been forced to stay at home, many people have had to learn to cook for the first time, and once these skills are learned they can last for a lifetime. We envision a newfound frugality after this crisis which could further benefit the grocery channel longer term.

Given that global debt to GDP is now in excess of 350%, we are more attracted to businesses that sell lower ticket items which are less dependent upon a strong economy for their demand.

First Quarter 2020 Performance Update

Auxier Focus Fund’s Investor Class returned -21.10% in the first quarter vs. -19.60% for the cap-weighted S&P 500 Index and -22.73% for the DJIA. The equal-weight S&P 500 lost 26.7%. Small stocks as measured by the Russell 2000 were down 30.61%. Emerging markets as measured by the MSCI Emerging Markets Index declined 23.6%. Stocks in the Fund comprised 94.1% of the portfolio. The equity breakdown was 81.9% domestic and 12.2% foreign, with 5.9% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception in July 1999 to March 31, 2020 is now worth $34,948 vs. $27,452 for the S&P 500. The equities in the Fund (entire portfolio, not share class specific) have had a cumulative return of 491.81% since inception and the Fund as a whole has had a cumulative return of 249.48%. vs. 174.52% for the S&P. This was achieved with an average exposure to the market of less than 82% over the entire period. According to Dimensional Fund Advisors in Mutual Fund Landscape 2019, only 42% of equity mutual funds launched before 1999 were still standing 20 years later, and only 23% of the surviving funds managed to beat their benchmark (as of 12/31/2018).

Contributors to the quarter:  Our outlook on a cross section of portfolio positions with a positive return for the quarter ended 3/31/2020.

Kroger (KR)
Unlike many businesses this quarter, Kroger saw increased traffic and demand amid the government lockdowns.  Due to uncertainty around the potential impact of the virus and how long the world will be affected, many people have been stocking up on the basics which has translated to strong fundamentals for Kroger. In March alone, Kroger experienced a 30% nationwide rise in sales and was one of the few stocks to gain during the first quarter, up 5.1%.

Biogen (BIIB)
Biogen continues to be one of the most focused biotech companies on diseases of the brain. They have a broad neurology pipeline. Sentiment around Biogen continues to be driven by positive results surrounding the company’s Alzheimer’s drug Aducanumab. With no current cure for Alzheimer’s, the potential that Biogen could have the only successful drug in that space helped keep the stock price up this quarter.  Biogen has worked to fortify their supply chain in order to ensure that patients will continue to receive their treatments. Along with Aducanumab, Biogen has four other treatments currently in phase three trials and twelve in phase two trials.

Microsoft Corporation (MSFT)
Microsoft’s continued shift to more digital services helped offset some of the virus-related headwinds during the quarter. Their earnings release in January showed that Azure cloud revenue grew 62%. Azure revenue has grown over 50% in each of the last four quarters. Work-from-home policies have led to increased usage of Microsoft’s online services. The company revealed that their Teams collaboration and communication service had 75 million daily active users during the shutdown, adding 31 million in just one month. Globally, usage of the company’s virtual desktop software has tripled since the crisis began.

Detractors to the quarter:  Our outlook on a cross section of portfolio positions with a negative return for the quarter ended 3/31/2020.

Mastercard Inc. (MA)
Mastercard has seen a deceleration in business from the lockdowns. Roughly 22% of their revenues are cross-border transactions which are sensitive to global travel. With the growth in online shopping, the use of digital payments has accelerated over cash. Also, cash tends to carry more germs and requires face-to-face interactions. They are likely well situated to survive any short-term negative environment with nearly $7 billion in cash and equivalents and the historical ability to generate over $8 billion in cash from operating activities annually.

Bank of America Corp. (BAC)
The projected economic slowdown and low interest rates have severely weakened banks’ outlooks. Bank of America increased loan loss reserves by $3.6 billion in the quarter. The Fed’s zero interest rate policy is terrible for the entire banking industry. A positive is BAC’s leadership in digital banking with 39.1 million digital customers. They have also kept a clean balance sheet with a common equity tier (CET1) ratio1 of 11.2%. Berkshire Hathaway owns close to a 10 % stake.

Bank of New York Mellon Corp. (BK)
Bank of New York has consistently been number one or two in the US with assets under custody over $35 trillion. Although they are not a spread lender, low interest rates have impacted cash balance returns. In the past financial crisis in 2009 the US government parked their cash with Bank of New York. They have historically earned over 15% on tangible equity while maintaining a strong balance sheet with a CET1 ratio of 11.5%. Berkshire Hathaway has been a recent purchaser of Bank of New York Mellon and now owns approximately 9% of the company.

Past Epidemic Market Returns

We have included a chart that shows past epidemics and market returns six months and 12 months later. The results are encouraging and illustrate how quickly recoveries can take place. However, this virus has the new variable of government mandated lockdowns which adds risk. If California were a country it would rank as the seventh largest on earth, with a GDP of $2.9 trillion. They are instigating one of the harshest stay-at-home orders of any state, contributing to shocking unemployment levels–over 20 million nationally.

In Closing

As we face a once in a generation pandemic, we strive to position the Fund’s portfolio to survive the most challenging markets and economic downturns. After witnessing spectacular blow-ups over the years, we have learned to verify facts and not just trust “experts” and models which are often blindly taken for truth. Our focus on enduring businesses with solid free cash flow and balance sheet strength becomes even more critical during these stressful periods. Short-term the Fed has unleashed an off-the-charts $6 trillion stimulus package that could soon reach $10-12 trillion. This is so powerful it can drive up stock prices dramatically, often at levels detached from underlying cash flows. This stimulus is monumental–three times larger than any prior action. The Fed is buying all kinds of assets, including distressed debt, for the first time. Long-term, earnings and cash flows will ultimately drive the intrinsic value of each company. Our approach to the markets has been consistent since we started the Fund in 1999. Instead of predicting markets we would rather focus on making great buys of quality business models and diligent management that have the potential to survive and thrive in any environment. During these times of heightened volatility and fear we seek wisdom from the likes of Bernard Baruch, a financier who successfully navigated during the Great Depression. He preached, “Facts are facts even in the height of emotion.” Perception of risk can often be distorted in markets when volatility is extreme.  The risk can be far lower when fear is high. Conversely, euphoria can be extremely risky with the greater chance of permanent capital loss.

We appreciate your trust.

Jeff Auxier

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses.  This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website.  Please read the prospectus carefully before you invest.

Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived.  Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary.   Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”).  Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds.  The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund. 

The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund’s portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.

Foreside Fund Services, LLC, distributor.

1CET1 ratio compares a bank’s capital against its risk-weighted assets to determine its ability to withstand financial distress. The core capital of a bank includes equity capital and disclosed reserves such as retained earnings.

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 market-capitalization-weighted widely held common stocks. The Dow Jones Industrial Average is a price weighted index designed to represent the stock performance of large, well-known U.S. companies within the utilities industry. The S&P 500 Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight (0.2%) of the index total at each quarterly rebalance.  The Russell 2000 index is an index measuring the performance of approximately 2,000 smallest-cap American companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. stocks. It is a market-cap weighted index. The MSCI Emerging Market Index captures mid and large caps across more than two dozen emerging market countries. The index is a float-adjusted market capitalization index, and represents 13% of global market capitalization. One cannot invest directly in an index or average.

The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter.  These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.

 

Auxier Report: Winter 2019

Dec 31, 2019

Download Auxier Report Winter 2019

Winter 2019 Market Commentary

In the fourth quarter, the combination of a US-China trade deal, a resolution of Brexit and sharp declines in interest rates provided strong tailwinds for equities both domestic and international.  A record low unemployment rate, declining energy prices and historically low borrowing costs have aided consumer spending and the service sector. Long-term interest rates, as measured by the 30-year Treasury bond, declined from 3.02% at the end of 2018 to 2.39% as of December 31, 2019. Rock bottom interest rates led to a refinancing boom which accounted for 38% of mortgage originations in 2019 (WSJ). Declining rates also helped price-earnings (P/E) multiples expand as operating earnings for the full year 2019 were lackluster. Earnings growth only contributed 8% of the market gain according to Goldman Sachs. The S&P forward P/E expanded from 14 times to 19 times and accounted for 92% of the gain. Corporate share buybacks provided more demand than any other source as individuals were generally net sellers. Some estimate corporate share purchases offset individual sales seven-fold. While increased refinancing could indicate consumers’ confidence in a strong economy, we remain focused on thorough research to be able to navigate a market that may be in a state of euphoria.

Cloud Services at the Front of Digitization

The public cloud service industry has become incredibly important in our rapidly digitizing world. The global cloud industry was estimated to be worth $227.8 billion in 2019 and is expected to reach $266.4 billion in 2020 (Gartner). The cloud market is currently made up of dozens of companies but the two leaders, Amazon and Microsoft, dominate the rest of the market. There are three main types of cloud computing services: Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS). IaaS is one of the most important types of cloud services because it provides users online access to servers for storage and networking. PaaS allows customers to use a provider’s servers to develop and host applications without needing to maintain and manage the backend infrastructure. Amazon is the current leader in IaaS and PaaS with a market share of nearly 40% (Synergy Research Group). SaaS is the third type of cloud service and it is how companies like Microsoft provide their users with software such as Microsoft Office. SaaS allows providers to automatically update their applications to ensure that users always have the best experience. Microsoft is the current leader in SaaS with a market share of 17% (Synergy Research Group). More companies are looking to move their data to the cloud due to the greater security and flexibility it provides which is creating healthy growth for the market. From 2019 to 2022 global public cloud service revenue is expected to grow at a compound annual growth rate (CAGR) of

15.89% (Gartner). One positive aspect of the growth in the cloud industry is just how diverse the market is. Companies specialize in different areas like Amazon with infrastructure, Microsoft with software and Oracle with data security. These specialties provide consumers with greater choice and flexibility in the type of cloud service they need. Many customers will use the cloud services from several providers to build the most efficient and effective solution for their business. Because of this, companies like Amazon and Microsoft can afford to expand and grow without necessarily taking market share from each other. We like these market dynamics as it gives us the ability to invest in different cloud companies with different strengths and priorities in the same market. Keeping an eye on developments in this space will be important as more companies shift from on-premise solutions to cloud solutions.

Technological Innovation is Key

Technological innovation continues to be an important driving force in the market as businesses look for ways to disrupt their industries and improve their operations. Data analytics, cloud computing, artificial intelligence (AI) and 5G connectivity are major disruptors. Oracle is a company that is looking to shake up the cloud market with their autonomous database. Using AI and data analytics, the database can cut down on workloads and server downtimes as it can detect and patch security flaws, as well as perform regular maintenance, autonomously. We dig deep to find new technologies like this that have the potential to change the landscape of an industry so we can be on the forefront of that disruption. Another business we like with a focus on digital innovation is Medtronic. Medtronic has created smart medical devices that can improve the lives of patients such as a closed loop insulin pump that can detect changes in blood sugar levels and automatically administer the correct amount of insulin. Watching developments in technological innovation remains vital to our work as they can have a large impact on the market. The top 5 contributors to the returns of the S&P 500 in 2019 were all technology stocks. Apple and Microsoft led the returns for the S&P 500 and together accounted for 14.8% of the total return in 2019 (CNBC). It is easy to get swept up in the exciting stories of these fast-growing tech stocks, but it is important for us to remain vigilant and prioritize enduring business models and strong fundamentals over exciting stories. 5G connectivity, which boasts incredible speeds and low latency, is another technology that is expected to be a disruptor in the market. 5G technology could have many applications such as allowing for remote surgical operations with essentially no lag time. Self-driving technology could improve by allowing cars to communicate with each other to increase safety. Though there are many potential uses for 5G technology, Cowen predicts that 5G is still in its infancy and won’t be available for mass market adoption until at least 2022. Developments with 5G will be on our radar as more companies begin to adopt the technology.

Fourth Quarter 2019 Performance Update

Auxier Focus Fund’s Investor Class returned 8.28% in the fourth quarter vs.  9.07% for the S&P 500 Index,  6.67% for the DJIA and 5.12% for the Lipper Balanced Fund Index.  Stocks in the Fund comprised 96.3% and returned 8.93%. The equity breakdown was 82.6% domestic and 13.7% foreign, with 3.7% short-term debt instruments. For the full year 2019 the Fund returned 20.20%, DJIA 25.34%, S&P 500 31.49% and the Lipper Balanced Fund Index 19.44%.  A hypothetical $10,000 investment in the Fund since inception in July 1999 to December 31, 2019 is now worth $44,294 vs. $34,144 for the S&P 500. The equities in the Fund had a cumulative return of 501.26% since inception and the Fund as a whole had a cumulative return of 342.93%. This was achieved with an average exposure to the market of less than 79% over the entire period.

Contributors to the quarter:  Our outlook on a cross section of portfolio positions with a positive return for the quarter ended 12/31/2019.

UnitedHealth Group (UNH)
During 2019 UnitedHealth stock was heavily impacted by discourse around the 2020 presidential elections. Several candidates support a single-payer healthcare system that could have a negative effect on companies like UnitedHealth. During the quarter healthcare stocks moved higher as talk of a single-payer system died down. The business side of UnitedHealth performed well during the most recent quarter as revenue and earnings per share grew 6.7% and 13.3%, respectively. Management has provided guidance for high single digit revenue growth and cash flow generation of over $19 billion in 2020. Positive cash flow generation has allowed the company to maintain a steady dividend yield even as their stock price has risen.

Bank of America Corporation (BAC)
The company has been growing their reach by adapting to the shift towards digital banking and transactions. 100% of Bank of America’s 16,626 ATMs are contactless enabled to allow customers the convenience of only needing to use their phones. The company’s digital payment partner, Zelle, continues to grow, ending the most recent quarter with 8.9 million active users and 80.8 million transactions. Management hopes that their continued investment in digital technology will appeal to a wider range of consumers, specifically the younger generation. The Fed voted in December to keep interest rates steady, which after several rate reductions, is seen as a positive development for the banking industry.

Anthem, Inc. (ANTM)
Like UnitedHealth, Anthem has been affected by the primary debates, but the recent change in expectations of a single-payer healthcare system has boosted the stock price over the last quarter. Future price movements for Anthem may continue to be impacted by ongoing election year debates. Anthem’s membership base stood at nearly 41 million members as of October 2019, an increase of 2.7% over October of last year. Both revenue and earnings increased by double digits during the quarter due to membership growth and premium rate increases. The company has been consistent with returning capital to their shareholders returning over 50% of their net income through share repurchases and dividends.

Mastercard (MA)
The strength of the U.S. economy continued to drive growth in the top and bottom lines for Mastercard. Gross dollar volume for the most recent quarter was up over 10%. Management runs an asset-light business which gives the company the flexibility to acquire new companies and technologies to grow their reach. The company recently acquired the cybersecurity firm  RiskRecon as growth in digital transactions will require more secure systems. Even as digital payments continue to grow, cash is still the most widely used form of payment in the world which signifies the massive potential for growth for Mastercard as consumers continue to move away from using cash. In the US, digital transactions have been growing at nearly twice the GDP growth rate (McKinsey & Company). Digital wallets like Apple Pay have made electronic payments more convenient and secure which could benefit companies like Mastercard if fewer consumers feel the need to carry around a physical wallet full of cash.

Microsoft Corporation (MSFT)
In the most recent quarter, Microsoft saw their revenue and earnings increase by 14% and 21% respectively. This growth was led by the strength of their Azure cloud which grew by 59%.  Management has been investing in their cloud AI platform and their investments are starting to pay off as Azure AI is used by more than 85% of the Fortune 100 companies. In October, Microsoft won the contract for the Pentagon’s Joint Enterprise Defense Infrastructure (JEDI) service. The contract is valued at $10 billion over the next 10 years. As part of the contract, Microsoft will provide cloud-based enterprise services to the Department of Defense. This contract win is another positive step in improving Microsoft’s competative edge in the cloud services industry. The company plans to continue to invest in their digital and cloud services and management still expects double digit revenue and operating income growth for the full-year 2020.

Alphabet Inc. (GOOG)
Even as one of the largest companies in the world, Alphabet has continued to innovate with new services and technologies which has led to consistent growth. Alphabet  operates with low levels of debt and positive cash flow. In November, Alphabet purchased fitness and health company Fitbit for $2.1 billion. Alphabet currently develops the software that other smartwatch makers use, but this acquisition will allow them to compete with companies like Apple on the hardware side . This purchase also gives Alphabet access to valuable user data that they will be able to use to improve their other products and services. Alphabet made advances in AI with their BERT program. This AI  can recognize more subtle patterns in language which will allow Alphabet to provide better search results. Cloud services grew 38.5% in the most recent quarter and Alphabet plans to continue to focus on the rapidly growing industry. The company announced a 10-year partnership with Mayo Clinic to provide advanced cloud computing and data analytics to help improve their healthcare outcomes. In December, the company announced that Sundar Pichai would be taking over as CEO following the decision of co-founder Larry Page to step down from the role. Pichai is focused on bringing more transparency to the company which could help ease user’s concerns over Alphabet’s use of data.

Detractors to the quarter:  Our outlook on a cross section of portfolio positions with a negative return for the quarter ended 12/31/2019.

The Travelers Companies Inc. (TRV)
The Travelers Companies took a hit in October when they released their third quarter results. Travelers has been particularly hurt by asbestos related claims as well as unfavorable general liability and commercial auto reserves. Due to these challenges we are seeing a favorable trend in pricing. Despite these headwinds, Travelers increased their net written premiums by 7% due to growth from all three of their business segments. Management is focused on cutting costs in order to return capital to their shareholders. In the first nine months of 2019, Travelers returned $1.8 billion to shareholders through dividends and share repurchases

American International Group (AIG)
Much like Travelers, AIG has had to work against a tough macro environment for insurance companies. However, they have managed to post positive results with total premiums and deposits increasing over 10%. AIG also managed to return to profitability after difficult results in 2018 due to high catastrophe losses from the 14 separate natural disasters that caused over a billion dollars in damages (NOAA). Premiums tend to rise after natural disasters and AIG is well positioned to take advantage with higher margins. In November, AIG announced that they were selling a 77% ownership stake in Fortitude Group to The Carlyle Group and T&D Holdings for approximately $1.8 billion in order to streamline their business.

Molson Coors Brewing Co. (TAP)
In 2018 alone, the volume of beer consumed in the United States declined by 1.6% with most of the decline coming in below premium brands such as Keystone Light and Coors Light (IWSR). With this trend not expected to slow anytime soon Molson Coors Brewing is working to transform into a total beverage company by diversifying into other beverages. Their two main goals in their diversification have been in growing their premium brands such as Blue Moon and Peroni and expanding into beverages beyond beer such as seltzers, wines, hard coffees, and THC and CBD non-alcoholic beverages. According to BDS Analytics and Arcview Market Research, the US CBD market is expected to grow from $1.9 billion in 2018 to over $20 billion by 2024 for a CAGR of 49%. With its size and distribution experience, Molson Coors could scale their operations faster and more efficiently than smaller businesses. Molson Coors is expecting $1.4 billion in free cash flow in 2019 as they reduce costs and work to make their company more efficient.

Oracle Corporation (ORCL)
As part of their ongoing restructuring, Oracle has continued to shift more of their business to their cloud services and license support unit which now accounts for 71% of their revenue. While they are operating on a smaller scale than market leaders Amazon and Microsoft, they recently announced an initiative to allow their software to work with Microsoft’s in order to compete better against Amazon. Oracle is leading the field in autonomous databases and that fast-growing unit could provide a revenue tailwind in the future. Management has expressed interest in small acquisitions to improve their services, however, in a high market environment they have attempted to avoid overpaying for acquisitions and have instead spent their cash on stock buybacks. In 2019 they had a buyback yield of 14.77%.

Unilever plc (UL)
As Unilever is struggling to find growth opportunities in their developed markets in Europe and North America, their focus has shifted to emerging markets in Southeast Asia and South America. While underlying sales declined slightly in their developed markets, 5.1% growth in their emerging markets helped to boost the company to 2.9% underlying sales growth overall. Unilever CEO, Alan Jope, has worked to enhance their E-commerce capabilities since taking over at the start of 2019. Jope has also encouraged their divisions to work on increasing their local footprint with the 70-20-10 strategy. This attempts to combat the erosion large-cap consumer companies have experienced from smaller, local retailers who can more easily tailor their strategy to the market they are in. Unilever had strong free cash flow generation of €6.1 billion in 2019.

Yum! Brands, Inc. (YUM)
Yum! Brands has taken a hit on tough competition for Pizza Hut. They have struggled to keep up with Dominoes’ prices and delivery speed and have been slow to adapt to new fast-casual pizza chains such as Blaze, Mod and Pieology. Their $200 million investment in Grubhub has fared poorly. However, KFC and Taco Bell both had same-store sales growth of over 3% as well as operating margin expansion. Yum! Brands’ diversity in fast food affords them a greater stability should one of their three brands falter. They had over $700 million in free cash flow in the quarter and are projecting greater than 100% free cash flow conversion in 2020.

In Closing  

We have recently traveled to eight states on research and business meetings and have seen the rapid adoption and application of technology first-hand along with the effect that market competition has on efficiency. Increased competition between Uber and Lyft is improving the service of cabs and rental cars while Airbnb is disrupting the hotel industry. A smart phone in every pocket along with low gas prices are leading to more travel as young and old seek out meaningful experiences.  Airports and restaurants are busy. The exponential doubling of knowledge is accelerating the cures for chronic diseases and advances in data analytics. We remain focused on analyzing sustainable, enduring businesses with growing sales, cash flows and earnings. We are looking for high ethics and management teams that are using technology to stay relevant in a rapidly digitizing world. Data analytics, AI, enterprise software, cloud services and mobile applications are rapidly disrupting entire industries. We want to make sure we are on the right side of the digital transition.

We appreciate your trust.

Jeff Auxier

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses.  This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website.  Please read the prospectus carefully before you invest.

Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived.  Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary.   Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”).  Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds.  The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund. 

The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund’s portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.

Foreside Fund Services, LLC, distributor.

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. The Dow Jones Industrial Average is a price weighted index designed to represent the stock performance of large, well-known U.S. companies within the utilities industry. The Lipper Balanced Fund Index is an equally weighted index of the 30 largest US Balanced Funds. One cannot invest directly in an index or average.

The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter.  These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.

Auxier Report: Fall 2019

Sep 30, 2019

Fall 2019 Market Commentary

We continue to see corrective price action in many industries   since the market highs of January 2018. The global transportation, materials, agriculture and manufacturing industries are a few discounting a recession. Europe, Japan, China and emerging markets have been weak on trade tensions, political uncertainties of Brexit and historic lows in many commodities (many under cost of production). In the US, a continued expansion in labor markets, resilient consumer spending and a stable service sector are positives for the domestic economy. Homebuilder order growth has accelerated with the recent drop in mortgage rates.  According to Standard and Poor’s, the spread between the most expensive and least expensive stocks is one of the highest in the past 70 years.  Up until recently the most overpriced names have often been outperforming the cheapest.  However, we are starting to see many momentum stocks with exciting stories   come back to earth as investors are shifting focus back to cash flow and away from “revenue growth at any price.”

Don’t Fight the Fed

According to Evercore ISI in the past three months there have been 40 rate cuts by monetary authorities around the world. In addition, the Fed has been expanding their balance sheet to the tune of $60 billion a month. Back in 1995 and 1998 the Fed was able to prolong an extended US economic expansion with a series of rate cuts, even as Japan, the number two economy, was suffering from a major downturn. Instead of instigating much needed restructuring many countries, especially in Europe, are overly reliant on monetary policy and negative interest rates to stimulate their economies.  Globally we are seeing historically low yields (and high prices) with over $13 trillion in negative rates. According to JP Morgan, since 1958 the average yield on US 10-year Treasury notes has been 6.05%. Recently we saw yields drop to 1.45%. As a result, bonds and bond surrogates such as real estate, utilities and consumer staples, have been strong performers so far in 2019. However, on the downside, a 1% increase in rates would lead to a drop of over 20% in 30-year Treasury bond prices. With bonds you have purchasing power risk, as governments love to spend, but also interest rate risk not previously seen in our lifetime. While low rates inflate asset values it hurts the banking industry especially when rates turn negative.  The average European bank trades at less than 50% of its book value. US banks trade at very cheap price-earnings ratios as well. In past recessions high and escalating energy prices have often been a major contributor to downturns. This time we have energy gluts in oil and natural gas and declining prices for many alternatives like wind and solar. Battery storage is making huge advances. This continues to act as a tailwind for US consumer spending and the service sector. Low energy prices have negatively impacted many emerging markets that are dependent on oil.

We aggressively research hundreds of companies over the course of the year to stay on the pulse of industry dynamics, supply and demand, etc. We track credit markets and balance sheets. We want to be ready when there is a turn in fundamentals—up or down.  We are seeking facts. Since our focus is on maintaining the power of compounded returns, we see diligent research as important in mitigating risk.  Since 1989 the Japanese market is down by about half.  To passively have held that in an index would have been a disaster.  Markets can go sideways or down for years. We have found that the careful purchase of outstanding “high return” businesses with a heart and soul, capable management, with “skin in the game” may be a viable formula for success.

Market Purging Speculative Manias

Historically, easy money has led to numerous speculative manias that have ended badly. The Economist magazine had a letter of correspondence in the 1860s citing easy money back then as the cause of manias. “It is equally beyond doubt, that every speculative mania which has run its course of folly and disaster in this country has derived its original impulse from cheap money.” Fast forward to today, we are witnessing a   purging in money losing speculative companies with questionable business models.  Overhyped venture capital backed businesses from Japan, China and Silicon Valley are collapsing. WeWork, funded by Japanese firm Softbank was being touted by major brokerage firms to be worth as much as $92 billion a few months ago. The model of transforming rented office space into smaller units has historically been a failure for the past sixty years. It now has been revalued to less than $7 billion.  Tilray, a leading Canadian marijuana company has recently declined from $300 to $23 as fundamentals have failed to materialize as promised. There is a surplus of food delivery stocks funded with seemingly “free money.” DoorDash, Postmates, Uber Eats and Grubhub to name a few. Grubhub recently suffered a 43% one-day decline.  There is a belief in the venture world that if you are losing money on every transaction that magically increased volume will help. When rates are low the promoters come out in full force. There is an old saying that a fool and his money are invited everywhere.   Private equity is another area of   excess that many institutions see as “low risk”. Yet the model depends on paying inflated prices for businesses then applying extreme leverage which is risky in a period of record leverage loans. We are watching closely for goodwill write-downs like the $15.4 billion suffered by Kraft Heinz this year when they overpaid for Kraft which torpedoed the stock. By some estimates there is still over $2 trillion in buying power in the private equity industry.  Overpaying and overborrowing destroys shareholder value over time. While money is flowing into private markets, we see the inherent volatility and mandated disclosure of public markets as a better bet for long term compounding. Greater transparency underscores the importance of high-grade ethics to endure. Those cutting corners are getting crushed. The proliferation of headline-driven program trading may benefit the serious investor willing to research individual businesses.  Material misappraisals take place with headline-driven momentum trading. We are finally seeing a renewed focus on productive assets with strong underlying cash flows as opposed to money losing story-stocks where revenue growth was prized at any price. Valuation is making a comeback in the investment equation.

Policy and Political Leadership – Ignore it at Your Peril

In August, Argentina suffered the second biggest crash of any stock market since 1950.  The MERVAL Index plummeted 48% in one trading session. This was the result of elections showing the left-wing populist leader Alberto Fernandez pulling ahead in the polls. Extreme socialism is the enemy of free enterprise. Argentina has defaulted on its government debt eight times since 1816 yet was able to sell 100-year bonds two years ago. Venezuela’s radical social populism has crushed their government debt as inflation exceeded 1.37 million percent in 2018 (Source IMF). This is why we prefer to invest in   businesses, not markets.  The financial industry likes to put investor money in scalable models which leads  to opaque structures and often overcrowding.  This can work in up markets but not during long periods of flat to declining markets, which history shows occur over 40% of the time. It can be hard to stay the course in such periods.  There are so many ways to lose money, especially if you don’t know what you own.

Healthcare Stocks Lagging but High-Quality Solid Value

Healthcare stocks in general have suffered price-earnings compression from negative macro headlines like “Medicare for All.” We see opportunity in gloom and   are focusing on innovative companies and managements utilizing rapid advances in data analytics, compounding knowledge and artificial intelligence to increase the odds of cures for many of the most devastating chronic illnesses.  Healthcare is showing some of the best relative earnings for the quarter with strong free cash, yet many companies are trading at steep discounts to the overall market.  According to the American Diabetes Association one person develops diabetes every 21 seconds.  Over 5.8 million Americans suffers from Alzheimer’s.  Biogen has been a leader in diseases of the brain and has a strong position in the fight against Alzheimer’s with their drug aducanumab.  Yet, the stock recently traded at a mere nine times earnings.  Huge strides are being made in oncology as well through the immune system, with Merck’s Keytruda. Gene therapy is making rapid progress in fighting cystic fibrosis.

Streaming Wars too Much Supply

Over the past few years growth in online streaming has been quickly catching up to traditional cable. Globally streaming subscriptions grew 27% to 613.3 million in 2018 according to the Motion Picture Association of America (MPAA). This growth contrasted with traditional cable subscriptions which decreased by 2% to 556 million in 2018. Streaming growth is expected to continue to outpace cable as the rise of smartphones and tablets have increased the desire for more on-demand content. The streaming market has long been dominated by Netflix, but competition will soon intensify as big players like Disney and Apple enter the streaming space. Competition is bringing an increased focus on investing in quality original content. In 2018 Netflix spent $12.04 billion on content creation and licensing and Wall Street analysts expect content spending could increase to $15 billion in 2019. The Financial Times reported that Apple invested $6 billion into their streaming service. Disney only expects to spend just under $1 billion on original content in 2020. A large company like Disney may have an advantage over Netflix and Apple due to their massive library of brands like Star Wars, Marvel, Pixar and Disney’s own animated films. Disney can simply focus their investments on original shows and movies while competitors like Netflix must also pay licensing fees to fill out their catalog of content with movies and shows from other media companies. From an investor’s view we are monitoring the industry closely but are nervous with the massive spending on content over $30 billion for new shows in 2019 alone. Who has time to watch all that?

Third Quarter 2019 Performance Update

Auxier Focus Fund’s Investor Class returned -0.22% in the third quarter vs.  1.70% for the S&P 500 Index and 1.83% for the DJIA. Stocks in the Fund comprised 94.9% and declined -0.01%. The equity breakdown was 80.5% domestic and 14.4% foreign, with 5% short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception in July 1999 to September 30, 2019 is now worth $40,907 vs. $31,304 for the S&P 500. The equities in the Fund have returned over 570% since inception. This was achieved with an average exposure to the market of less than 79% over the entire period.

Contributors to the quarter:  Our outlook on a cross section of portfolio positions with a positive return for the quarter ended 9/30/2019.

MasterCard (MA)
MasterCard continued to grow during the quarter driven by the strength of the U.S. economy and as a result management has guided for double-digit revenue growth for 2019. The company’s balance sheet remains solid with manageable debt levels and positive free cash flow generation. The Indian payments market has been growing as the country demonetizes their currency.  MasterCard is intending to invest $1B in India to take advantage of a mobile payments market that has grown at a compound annual growth rate (CAGR) of 121% from 2013-2018 (RBC Capital Markets). MasterCard partnered with technology company R3 to develop a new cross-border payment system which aims to allow institutions to make secure real-time payments to each other. In 2018, 77% of the world’s transactions were completed with cash (McKinsey & Company). This number continues to fall as card payments become more widespread which could present further growth opportunities for MasterCard.

PepsiCo Inc. (PEP)
PepsiCo has been performing well over the last quarter and management has guided for 4% organic revenue growth for 2019. The company’s strong cash flow generation has given management the flexibility to invest in the growth of the business and they expect free cash flow of $5 billion for 2019. Increases in daily snacking habits have more than offset declines in the consumption of carbonated beverages. PepsiCo is making strides to be more environmentally conscious with a new target of reducing first-use plastic by 35% across their beverage portfolio by 2025. Management is working to make their business more sustainable to fit in with the shifting priorities of consumers. PepsiCo plans to continue to create new types of products to bolster their portfolio and keep up with changing market trends.

Raytheon Company (RTN)
Raytheon performed well during the quarter, growing both sales and earnings. The company’s performance is supported by a record backlog of $43 billion. Raytheon’s planned all-stock merger with United Technologies’ aerospace division is expected to close in the first half of 2020. This merger is designed to leverage nearly 100 years of experience to bring the company more in line with its competitors like Boeing and Lockheed Martin. Management is confident that the merged company will be a cash flow generating machine. Raytheon is continually creating new, and innovative products such as a new, smaller and cheaper missile that will replace the 30-year-old missile currently used in the F-35 fighter jet.

Medtronic plc (MDT)
During the quarter Medtronic unveiled its new robot assisted surgery platform that they claim is more flexible and cost-effective than other systems currently on the market. This robot is expected to launch internationally in early 2020 and after two years will be brought to the US. This robot aims to compete with Intuitive Surgical’s current robot that has been operating with little to no competition. Medtronic has been improving their expense structure which has led to operating margin expansion. Along with their surgical robot innovations Medtronic also plans to release the next generation of their MiniMed insulin pump in 2020 which aims to reduce finger sticks by 95%.

Microsoft Corporation (MSFT)
Microsoft’s Azure cloud platform continued to be the biggest growth driver for the company during the quarter. Microsoft is currently in second place in the cloud computing market and is growing more than twice as fast as the market leader Amazon (Gartner). The company’s balance sheet remains extremely solid as they have strong earnings and cash flow generation that will easily cover their debt obligations. Microsoft plans to invest their excess cash into creating new products such as Surface tablets and game consoles as well as improving the functionality of their cloud platform to remain competitive in the space. Management reaffirmed their full year 2020 guidance of double-digit revenue growth and expects their cloud platform to be the main driver.

Detractors to the quarter:  Our outlook on a cross section of portfolio positions with a negative return for the quarter ended 9/30/2019.

Discovery, Inc.  (DISCA)
With the amount of content available today, Discovery has made it a priority to focus on more niche programming in order to compete in the current streaming market. At the end of September Discovery announced the launch of the Food Network Kitchen, a direct-to-consumer product with live streaming and new interactive cooking instructions each week. Food Network Kitchen will also offer over 800 on-demand classes, online shopping and home delivery and plans to be available through all Amazon, iOS and Android devices. A limited version of Food Network Kitchen is intended to be available for free at the end of October while the full suite of products will be available for $6.99 a month or $59.99 a year. Discovery had nearly $600 million in free cash flow this past quarter.

Johnson & Johnson (JNJ)
Johnson & Johnson has been struggling for most of the year due to lawsuits related to their role in the opioid crisis and talcum powder products. In August, a judge in Oklahoma ruled that Johnson & Johnson was responsible for paying for one year of Oklahoma’s costs related to opioid addiction. This came out to $572 million, and although it may seem like a lot, it was viewed as a win for them as it came well short of the 20 years of costs, or $17 billion, that Oklahoma was seeking. The talcum powder lawsuits all allege that Johnson & Johnson’s talcum powder causes ovarian cancer and mesothelioma in women using it for personal hygiene.  Johnson & Johnson has maintained that their products do not contain asbestos and that talc is not a known carcinogen. Talc has over 30 years of medical studies showing it is safe for human use. While the negative headlines in the short term are likely to continue to weigh on Johnson & Johnson, their strong pipeline and fundamentals should be enough to carry them through. They currently have over 30 drugs in phase three trials.

Corning Inc. (GLW)
The company that made the glass for Thomas Edison’s first lightbulb has gone through dozens of transformations over its 168-year history and is currently going through another one. As Corning’s revenue from TV manufacturers and wireless carriers shrinks it has been forced to come up with an alternative source of revenue to make up for their declining sales in other sectors. Luckily for Corning their product Gorilla Glass has been making up for their losses in other sectors as it is a key product in smart phones, tablets and smart screens in cars. As the demand for strong, shatterproof glass in phones, tablets and cars continues to grow, Gorilla Glass has Corning well positioned to take advantage. Apple recently announced a $250 million investment in Corning from their Advanced Manufacturing Fund.

Anthem Inc. (ANTM)
The health insurance industry has been down on talks of Medicare-for-All in the Democratic Primary overriding the otherwise positive results from Anthem. Both Sen. Warren and Sen. Sanders have healthcare proposals that would either eliminate or severely cut down the role of private health insurance providers at an estimated cost in excess of $30 trillion. Health insurance stocks have gone down as the odds that one of these senators is elected goes up. Although it is possible, and starting to become more likely, that one of these senators is nominated as the democratic nominee they would still have to win the general election before attempting to get a bill through Congress, which seems unlikely given Majority Leader Mitch McConnell has said multiple times that he would never allow a Medicare-for-All style bill through the Senate. While the threat of these healthcare plans is not nothing, it remains incredibly unlikely that the health insurance industry is going to be legislated out of existence.

UnitedHealth Group (UNH)
UnitedHealth Group is experiencing the same problems as Anthem with the negative sentiment in the industry overriding its positive results. Total revenues were up 8% while net earnings grew 15%.   UnitedHealth is a leader in data analytics and enjoys significant scale and cost advantages due to its powerful network effect. It maintains a solid balance sheet and over $17 billion in cash.

In Closing

Transparency of the internet is underscoring the great importance of ethics in leadership as many companies cutting corners are suffering the consequences. We are still finding opportunities during market weakness to add high quality businesses with strong free cash flows that have fallen out of favor as investors have gravitated to revenue momentum names. There appears to be the start of a reversion to the mean which should favor our disciplined approach to capital allocation. We aim to add value for our investors with our years of cumulative knowledge and hard study of   successful enduring businesses.  Research and rational reasoning are so critical and necessary in reducing risks and in pursuing compounded returns. We adhere to the Ben Franklin adage, “An investment in knowledge pays the best interest.”

We appreciate your trust.

Jeff Auxier

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses.  This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website.  Please read the prospectus carefully before you invest.

Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived.  Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary.   Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”).  Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds.  The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund. 

The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund’s portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.

Foreside Fund Services, LLC, distributor.

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. The Dow Jones Utility Average is a price weighted index designed to represent the stock performance of large, well-known U.S. companies within the utilities industry. The S&P MERVAL Index, Argentina’s flagship index, seeks to measure the performance of the largest, most liquid stocks trading on the Bolsas y Mercados Argentinos Exchange (BYMA) classified as domestic stocks. The constituents of the index must meet minimum size and liquidity requirements. One cannot invest directly in an index or average.

The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter.  These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.

 

Auxier Report: Summer 2019

Jun 30, 2019

Download Auxier Report Summer 2019

Summer 2019 Market Commentary

The US economy, while slowing, is still benefiting from a strong labor market, a stable service sector and robust consumer spending. Conversely big ticket “goods” producers are suffering from tariffs, a strong dollar and turmoil in the international markets.  39% of S&P 500 earnings in 2018 came from foreign countries (S&P Dow Jones Indices). Consumer facing franchises are generally seeing an improvement in sales trends and pricing. These include leaders in fast-food restaurants, coffee, snacks, beverages, skincare and other necessities. These businesses are reworking product offerings and utilizing technology to speed up service while enhancing the customer experience. Low fuel prices are helping to stimulate travel. This is particularly impactful for millennials who tend to value and spend on “experiences.” We continue to see strong fundamentals for businesses involved with the digital transformation of the economy, although prices for many of these businesses are getting prohibitively expensive.

Housing

The decline in the 30-year mortgage rate to 3.75% has stimulated refinancing activity. However high-end housing across the country has been softer partly due to the pull back of Chinese investment along with the limits on tax deductibility of mortgages over $750,000 and property taxes over $10,000, depending on your tax filing status. The dollar volume of homes purchased by foreigners for the 12 months ending in March was down 36%. First time buyers have been struggling to come up with down payments. Student loan debts nearing $1.6 trillion are impeding the growth of the entry level housing market.

New Technology Can Lead to Exuberant Pricing 

New technology disrupters garner excitement and often nosebleed valuations. A good example is the comparison of two transportation companies Uber and UPS. After 112 years UPS recently had their best quarterly performance in the history of the company. It operates in 220 countries and moves 3% of the global GDP of goods and 6%­ of US GDP. With profits exceeding $6.5 billion and a well-compensated workforce, it trades for a lower valuation than ride-sharing Uber which is losing $3 billion a year with a temporary workforce of drivers. FedEx is trading at ten times earnings, 40% lower than their historical valuation, over fears that Amazon will overtake them. We estimate it would cost a startup over $110 billion to get up to speed with FedEx which has been diligent in leadership through state-of-the-art ­logistics technology. In the late 1990s companies with great stories and no cash flow were the rage.  E-toys, Webvan food delivery and Pets.com all enjoyed great momentum and sky-high valuations until reality set in and they crashed and burned. Investing comes down to the cash an investment generates not just a story. We aggressively follow industry cycles and those with the most euphoria that are going parabolic tend to be late cycle. Excitement amid a merger frenzy marked the peak in commodities in 2011 after a 118-month boom. Commodities may have finally reached bottom after a painful eight-year correction. At the peak many commodities reached prices over double their cost of production. In farming it is so tough just to cover the cost of production. Today most of the farm sector is in a deep decline with farm incomes down over 50% from their peak while many commodities are trading for less than the cost of production. The odds favor food shortages in the next few years.

Companies in Secular Decline 

While we always like a bargain price many companies can appear to be statistically cheap but are actually in secular decline. Take Eastman Kodak, once a dominant blue chip.  It totally missed the digital transformation­ in photographs. We now take over two trillion pictures a year.  That is why an investor needs to be a dedicated, investigative researcher to seek out potential technological disruption that can interrupt the compounding of returns.  The power of compounded knowledge is also important to surviving and thriving over the long term.

Healthcare

Numerous health care stocks have lagged the market advance in 2019. Recurring adversarial headlines out of Washington DC have depressed valuations. The negative headlines drown out the exciting innovation that we see taking place that has the potential to cure many chronic diseases.  Abbot is making great strides in diabetes and heart valves. Medtronic is combining data analytics and artificial intelligence. Both Alphabet and Apple are making meaningful advances. Merck’s cancer fighting drug Keytruda is making excellent progress with sales gaining over 50% this past quarter. More competition and improved efficiency via technology is needed to drive costs lower. A total government takeover of healthcare could cost $32 trillion (Committee for a Responsible Federal Budget). Socialism means less competition and higher prices.  Venezuela’s state-run economic model now has inflation exceeding 10 million percent (CNBC). So much for “safe” sovereign debt. Venezuela was the number one ranked economy in Latin America in 2000.

Central Bank Distortion—Negative Interest Rates 

Nearly $13 trillion face amount of bonds from outside the US are priced to yield negative interest rates. If you deposit money in a savings account in a German bank you pay the bank interest. It is a form of competitive currency devaluation that gives an export advantage in the global markets. A risk is a prolonged trade/currency war. It is a man-made (central banks) distortion that leads to the misallocation of investments. It is killing European banks. Germany’s largest bank, Deutsche Bank recently dropped to less than one third of book value. Europe has relied heavily on monetary policy and has failed to make the tough policy decisions needed to restructure in order to unleash the potential of a market-based economy.

Hemp as a New Disrupter

The outlawing of hemp in 1937 (due to its relationship with its sister cannabis plant, marijuana) froze the development of the nation’s ability to understand the crop. However, with the passage of the 2018 Farm Bill, hemp was federally legalized. Through recent research, CBD effects on the body are being explored at greater lengths and scientists are finding beneficial uses across a vast array of medical applications. CBD has entered the market rapidly in accordance with recent deregulation and has created an unprecedented number of opportunities for development and investment. Due to the explosion of the hemp industry in a relatively short period of time, the supply chain has proven to be challenging. These bottlenecks are where investments could prove to be the most advantageous. CBD is positioned to eventually overshadow traditional over-the-counter pain relief (such as acetaminophen or ibuprofen). The health and wellness, beauty products, beverage and pet health industry have all championed this emerging hemp market and have benefited from this major introduction. The industrial side of hemp poses a similar number of disruptions as there is an incredible number of products that could soon be replaced by the hemp crop including certain textiles, plastics, building materials and insulation. Levi’s now makes a hemp shirt.  Oregon State University, in our back yard, has some of the best research in the country allowing us to gather unrivaled data and insights for identifying attractive investments.

Second Quarter 2019 Performance Update

Auxier Focus Fund’s Investor Class returned 1.92% in the second quarter vs. 4.30% for the S&P 500 Index and 3.21% for the DJIA. Stocks in the Fund comprised 95% and gained 2.24%. The equity breakdown was 81% domestic and 14% foreign. Health care stocks hurt performance for the year. A hypothetical $10,000 investment in the Fund since inception in July 1999 to June 30, 2019 is now worth $40,999 vs. $30,782 for the S&P 500. The equities in the fund have returned over 450% since inception. This was achieved with an average exposure to the market of less than 79% over the entire period.

Contributors to the quarter:  Our outlook on a cross section of portfolio positions with a positive return for the quarter ended 6/30/2019.  

Visa (V)
Visa Inc. saw strong performance in revenues and earnings for the quarter led by continued growth in payments volume, cross-border volume and processed transactions. During the quarter, the company repurchased 14 million shares of common stock using $2 billion of cash on hand. They have $8.3 billion of authorized funds available for further stock repurchases. Management expects revenue growth for the full-year 2019 to be in the low double-digits. Visa recently partnered with Razer to allow their 60 million users to make payments wherever Visa is accepted. This partnership will increase Visa’s reach in  Southeast Asia, a region which has a large underserved population of over 438 million. Visa also launched their payment system called Visa B2B Connect to offer seamless and secure cross-border payment processing for businesses.

PepsiCo Inc. (PEP)
PepsiCo is showing strong performance in their snacking and international segments. Shares have increased by 20.0% in the past six months, outperforming the S&P’s increase of 17.2%. The company’s growing snack business has largely offset slight dips in the beverage industry. PepsiCo has instituted a cost savings program that could achieve $1 billion in annual savings through 2023. They expect to generate cash flows of about $9B and return $8B to shareholders in the form of dividends and share repurchases. PepsiCo has cemented itself as one of the best dividend stocks on the market with 47 consecutive years of dividend hikes.

Microsoft Corporation (MSFT)
Microsoft’s revenue increased by 14% for the quarter while earnings increased by 19%. Revenue growth was led by increased demand for Microsoft’s Azure cloud offerings. Microsoft plans to increase their investment in cloud-based systems to continue to shrink the gap between them and Amazon in the cloud service segment. Microsoft has almost doubled its market share in the public cloud infrastructure industry over the last few years. They are now #2 in the cloud industry and well ahead of other competitors. Management is very optimistic about the continued growth of the company providing guidance of double-digit revenue and operating income growth over the next year. Microsoft’s debt is dwarfed by its near $1 trillion market cap. This should give the company the flexibility to continue investments in more growth-oriented projects.

Mastercard Inc. (MA)
Mastercard, the largest holding in the fund, continued its strong performance with another quarter of solid growth. Revenues were up 9% and net earnings were up 25% for the quarter. Revenue was boosted by a 12% increase in global gross dollar volume. Mastercard returned over $2 billion to shareholders in the form of share repurchases and dividends during the quarter. Year-to-date, Mastercard stock has increased by 40% versus a 17% increase in the S&P 500. Mastercard’s underlying infrastructure means that they can continue to increase the number of total transactions they can handle with only a minimal increase in expenses. Mastercard seems likely to benefit from the continued growth in the e-commerce industry which is currently growing five-times as fast as face-to-face transactions (eMarketer).

Detractors to the quarter:  Our outlook on a cross section of portfolio positions with a negative return for the quarter ended 6/30/2019.

Bank of New York Mellon Corp. (BK)
After coming over from Visa in July of 2017, CEO Charles Scharf has worked to transform Bank of New York Mellon just as he did with Visa. Under Scharf Visa nearly tripled in price due particularly to his focus on improving their technology infrastructure and diversifying the company through international expansion. At Bank of New York Mellon Scharf has also focused on diversification and technology. While the diversification has hurt margins in the short-term and the investments in technology have lowered current earnings, we believe that the improvements Scharf has made will pay off in the long run. In the short-term Bank of New York Mellon continues to return capital to their shareholders with a recent 11% dividend increase and a nearly $4 billion share repurchase authorization.

Kroger Co. (KR)
In the second year of their Restock Kroger program, Kroger is continuing to invest in their technology and infrastructure to make good on their goal to “deliver anything, anytime, anywhere.” The results from Kroger’s investments can already be seen as their total sales, excluding fuel and the effect of their sale of their convenience store business, were up 2%. They have a long history of success and are trading at a steep discount of around nine times earnings. Kroger used their $1.4 billion in free cash flow in the quarter to invest in their business and reduce their debt.

Philip Morris International (PM)
Philip Morris has been facing extreme currency pressure due to the strength of the US dollar. Despite the foreign exchange headwinds, they continue to dominate the international tobacco market with total market share increasing by a point to 28.4%. Their in-market sales were up 1.7% led by strong growth from their IQOS heated tobacco devices which grew by nearly 35%. IQOS has taken off in Japan and is starting to pick up steam across the rest of the globe with the EU and Russia both seeing double-digit growth. Philip Morris has marketed the IQOS devices as a substitute to traditional cigarettes that releases fewer chemicals since the tobacco is not burned. The rapid growth of IQOS is only projected to increase as local governments push this alternative.

Zimmer Biomet Holdings (ZBH)
Zimmer Biomet has faced some fixable issues with their supply chain hampering current operating results. However, they are a low-cost provider with a strong history in hip and knee replacements. Their rapidly growing S.E.T (surgical, sports medicine, extremities and trauma) and Spine & CMF (craniomaxillofacial) divisions leave them well positioned to take advantage of the growing demand for medical devices. The peak demand for hips and knees is 68 years old—just about the average age of the baby boomer today.  Zimmer Biomet is planning on using their strong free cash flow generation to further reduce their debt in 2019.

Our primary focus is to take advantage of the power of compounding with businesses and management teams that appear likely to successfully navigate through the most challenging environments. We search for solid businesses and managements, priced right, that can pursue compelling returns over long periods. The explosion of data has contributed to the power of networks and platforms. With network effects businesses can leverage their users with the potential to grow returns with greater scale. By utilizing data analytics and artificial intelligence they are better able to identify customer needs. This is especially true in digital advertising, Facebook, Google Search and YouTube are a few examples. As users increase, the value of the experience or product can increase exponentially.

Shortage of Shares 

Supply and demand is still favorable for publicly traded US stocks as buybacks are running close to $950 billion annualized (Standard & Poor’s). Private equity demand has exploded with over 8000 firms armed with over $2 trillion in buying power (Bain & Co.). We favor businesses with high free cash flow yields which private equity buyers seek. Industry mergers are common as well. With investors fear of volatility in public auction markets together with disclosure and regulation we think some of the best odds for success come when dealing with  smaller sums of money in the markets where investors can take advantage of the periodic waves of irrational behavior to score bargains not available in the private markets.

We appreciate your trust.

 

Jeff Auxier

 

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses.  This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website.  Please read the prospectus carefully before you invest.

Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived.  Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary.   Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”).  Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds.  The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund. 

The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund’s portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.

Foreside Fund Services, LLC, distributor.

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. One cannot invest directly in an index or average.

The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter.  These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.

 

Auxier Report: Spring 2019

Mar 31, 2019

Download Auxier Report Spring 2019

Spring 2019 Market Commentary 

Favorable economic trends in the US continued in the first quarter. Consumer spending comprises over two thirds of the US economy. Services are also big, contributing over 68% of US GDP and over 83% of private employment (Moody’s). Lower oil prices, declining borrowing costs, regulatory relief and increasing wages have provided a positive backdrop. Credit spreads are still very tight despite the accelerating growth in covenant-lite corporate debt and leveraged loans. The Fed made a material reversal at year-end and lower interest rates have fueled gains for both stocks and bonds. Unprecedented technological innovation is driving impressive productivity gains which has helped to keep inflation in check. If California were a country it would rank in the top five globally by GDP. The recent plethora of initial public offerings coming out of California this year is a huge positive for  that state which is heavily dependent on capital gains for the majority of its tax revenues. Trade uncertainty and Brexit are contributing to weakness in Europe, Japan and China which impacts US companies exposed to those end markets. $10 trillion in negative yielding bonds continues to hamper European banks and lending. Where socialism grows so does inflation and stagnation. Inflation in Venezuela now tops one million percent annually. Bondholders there have been crushed.

Program trading and the growth of exchange traded funds have led to some wild swings in securities as mathematical algorithms tied to momentum strategies accentuate moves–both up and down. Oil declined over 35% in the fourth quarter of 2018 only to rally over 40% in 2019. This highlights the importance of knowing the facts, fundamentals, supply/demand and underlying cash flows of what you own. In 2018 we endured two brutal corrections, one in the spring and one at year-end, marking the first time in 24 years that Treasury bills outperformed stocks. After a similar market decline in 1994 a strong rebound in equities lasted for three years. To enjoy the fruits of compounding it is so important to buy right and then  stick with good businesses over long periods.

Opportunities

Healthcare is an industry that can get hit hard on political headlines like “Medicare-for-All.” The cost of this proposal is estimated at $28-32 trillion over a decade (Urban Institute). Since 1999 we have done well buying  businesses with strong fundamentals where the headlines are gloomy. We see value in healthcare today.  Uncertainty and negative sentiment mask advances in the cures for many diseases through data analytics and medtech. Looking across the investment spectrum we see  excesses in venture funding and private equity.  Private equity firms are forced to pay high control premiums with borrowed money. There is now over $1.8 trillion in buying power in private equity. Bond yields  today after tax and inflation don’t compensate for the loss of purchasing power. The heavy mathematical-based trading in exchange traded funds is creating attractive opportunities as the liquidity buffers have diminished in recent years, leading to shocking drops and temporary misappraisals in many blue chip names. There is a big advantage in dealing with small sums of money that are not subject to a timetable or “liquidity event.” Our universe of investable ideas is large. According to Bernstein, the valuation spread between the most expensive and cheapest stocks is the widest in 70 years. Value tends to outperform when dispersion in valuations across the market is at an extreme.

Euphoria in Technology

Low interest rates have  contributed  to a boom in US venture funding ($137 billion in 2018) and now an avalanche in IPO supply. Just as we saw in 1999-2000, there is a growing enthusiasm surrounding money-losing business models. Many of the delivery models are dependent on freelance workers (gig economy) that tend to dry up in tight labor markets. Costs are sure to rise with unemployment levels at 50-year lows. Over $20 billion dollars a year is being poured into streaming content with more than 500 new programs this year. Who has time to watch all these shows? Some recent IPOs are seeing valuations in excess of 50 times sales, such as the enterprise software company Zoom, a provider of video conferencing. This compares with the average S&P company that trades less than three times sales. WeWork is a shared-office real estate company that is being valued at over $46 billion. Last year they lost $1.9 billion on revenue of $1.8 billion. This is starting to remind me  of March 2000, as envy took hold and retirees were putting 100% of their life savings in tech stocks that were going parabolic. Many internet mutual funds were doubling over short periods only to go out of business within three years. In 2000 the Nasdaq lost 39.29% of its value dropping from 4069.31 to 2470.52. The next year it retreated 21.05%, from 2470.52 to 1950.40. In 2002, the index lost 31.53% falling from 1950.40 to 1335.51. From the March 2000 high of 5048.62 to the October 2002 low of 1139.90 the Nasdaq index lost 76.81% (Dow Jones). So much for the efficient market theory. In 2018 speculators in Bitcoin lost over 75%.

Investing is about buying productive assets that will yield increasing cash flows over time. It is about understanding the qualities of management that can create or destroy value. It is the “craft of the specific.” At this point of the tech cycle over 81% of the new companies coming to market are losing money  (Dow Jones). The idea of putting your hard-earned savings on autopilot without an understanding of odds, fundamentals   and a daily  dedicated research effort has always baffled me.  Look at the S&P passive index craze which peaked in 1999 only to see the worst ten-year period in US stock market history through 2009. The Auxier Focus Fund returned a net 78.43% vs. -9.10 % for the S&P 500 from 12/31/99 to 12/31/09.

Economic Trends

Powerful investment trends include the digitization of the economy. Visa and Mastercard are enjoying the growth in the conversion from cash to plastic. Cerner is digitizing medical offices. Alphabet, Microsoft, Facebook, UnitedHealth and Amazon are examples of industry leaders that enjoy powerful networks and are utilizing artificial intelligence and  data analytics to drive productivity.  The advertising business is being transformed  as digital ads now exceed  50%. Newspapers have been on the wrong side of the digital trend in ads  as 1800 closed between 2004 and 2018 (Dow Jones). Travel fundamentals are very strong, global airfares are dropping and 80% of the world population has yet to travel on a plane. Boeing is suffering today but longer term their problems appear fixable and demand trends solid. People young and old love to travel and continue to value “experiences.” Airbnb, Booking Holdings and Marriott are some examples of companies that should continue to benefit.  The legalization of hemp is a potential disrupter in healthcare, cosmetics, food, plastics and building materials to name a few. In 1619, Jamestown colony law declared that all settlers were required to grow Indian hemp. George Washington and Thomas Jefferson were big hemp farmers. We see a huge market for hemp CBD oil in pain relief and the fight against inflammation. Oregon is a leader in hemp research.    

First Quarter 2019 Performance Update

Auxier Focus Fund’s Investor Class returned 9.16% in the first quarter vs.  13.65% for the S&P 500 Index and 11.81% for the DJIA. Stocks in the Fund comprised 92% and gained 11%. The equity breakdown was 79% domestic and 13% foreign.  A hypothetical $10,000 investment in the Fund since inception in July 1999 to March 31, 2019 is now worth $40,228 vs. $29,512 for the S&P 500. This was achieved with an average exposure to the market of less than 79% over the entire period. After the steep  13.52%   decline in the fourth quarter of  2018, The S&P 500 rebounded dramatically as the Fed  reversed policy pausing interest rate hikes. The fears of a sharp earnings recession have also abated with revenues growing over 5% in the first quarter.

Contributors to the quarter:  Our outlook on a cross section of portfolio positions with a positive return for the quarter ended 3/31/2019.

Mastercard Inc. (MA)
While the banks in general have languished, Visa and Mastercard have continued to show strong operating results and enjoy powerful networks in the face of an increasingly competitive payment space. The Fund has now gained over ten times the original investment in  Mastercard and nine-fold in Visa.  This shows the value of tracking fundamentals of individual businesses and  knowing which to hold for the very long term.  Mastercard has the third most blockchain patents of any company yet CEO Ajaypal Banga has remained cautious saying that “the business model is not proven” and that there was still “a lot to improve and change over time.”  However, in a recent conference (Fintech Ideas) Mastercard indicated they are still deeply invested in eventually using blockchain to improve supply chains and deter counterfeit goods.  Mastercard had  a 52% return on investment (ROI) in 2018 with over $5 billion in free cash flow.

Central Pacific Financial Corp (CPF)
Located in Hawaii, Central Pacific has been able to consistently improve key performance indicators including net interest income, net interest margin, return on equity and efficiency ratio. Hawaii saw a banner year with visitor expenditures of $18 billion, up 6.8% over 2017.

Zimmer Biomet Holdings (ZBH)
Zimmer Biomet specializes in knee and hip replacements while also providing a variety of other joint replacements. With the obesity rate in the United States over 30% and the number of Americans over 65 nearing 50 million, the demand for joint replacements will continue to grow. Zimmer Biomet is trading at a discount with a forward price-to-earnings ratio of under 15x. They had over $1.3 billion in free cash flow in 2018.

Microsoft Corp. (MSFT)
Satya Nadella has led Microsoft to another record quarter by focusing on Microsoft’s proprietary digital capabilities. This is most evident in their push in artificial intelligence, which can use Microsoft’s expansive amount of data to “learn” more than other programs could. Their subscriber and cloud-based products have been firing on all cylinders. Azure has been a rocket, growing over 70% in the first quarter alone. Microsoft has over $135 billion in cash and short-term investments and returned $6.1 billion to shareholders through dividends and share repurchases in the first quarter of 2019.

BP p.l.c. (BP)
CEO Bob Dudley’s bet on market stabilization has paid off with oil prices steadily rising since the new year leading to increased margins. BP has also started to reap the rewards of their heavy investments in discovery and technology. Their recent expansion in the Atlantis platform network increased production to 200,000 barrels of oil and 180 million cubic feet of natural gas per day. Meanwhile, their technology investments have allowed them to reduce overhead and cut their operating costs. BP has a dividend yield of over 5.5%.

Detractors to the quarter:  Our outlook on a cross section of portfolio positions with a negative return for the quarter ended 3/31/2019.

Biogen Inc. (BIIB)
Biogen dropped sharply on news it was canceling its once-promising Alzheimer’s drug, Aducanumab. One of the first Alzheimer’s drugs to make it to phase three trials, Aducanumab, had extraordinary potential but was canceled after disappointing trial results led Biogen to determine it was no longer a cost-effective investment. Still, they are the most focused company we can find in researching diseases of the brain like multiple sclerosis, Parkinson’s, and ALS.  Biogen is now trading at under 11x earnings and has remained flexible with nearly $5 billion in cash and equivalents.

The Kroger Co. (KR)
Kroger is in the first year of its 2020 Restock Kroger program that aims to improve efficiency and differentiate the company with exclusive brands. In 2018 Kroger achieved over $1 billion in cost savings through process improvements, adjusted earnings per share on the high range of guidance, and operating profit and free cash flow goals. In addition, they raised dividends for the 12th consecutive year, announced partnerships with Home Chef, Microsoft, Nuro, Ocado and Walgreens and expanded pickup and delivery to reach 91% of Kroger households. Like most grocery stores, Kroger has a high inventory turnover ratio of over 14x allowing them more flexibility in response to changes in the economy.

UnitedHealth Group (UNH)
UnitedHealth Group’s stock price  has corrected  mostly due to  a push for Medicare-for-All by presidential  candidate Bernie Sanders. The company has been successful with the use of data analytics and scale to serve clients at a lower cost than rivals. This has resulted in strong enrollment growth and industry leading returns on capital. They have been a leader in product innovation as well. UnitedHealthcare grew in the first quarter to now serve over 2 million people while Optum continues its strong performance with double-digit revenue and earnings growth. UnitedHealth had over $13 billion in free cash flow in 2018.

Berkshire Hathaway Inc. (BRK.B)
The holding company famous for its CEO Warren Buffett, Berkshire Hathaway has made a major bet on bank stocks which has hurt them due to the headwinds of a flat yield curve and slow loan growth. In addition, goodwill write-downs on Kraft Heinz cost Berkshire over $3 billion on its 26.7% stake. Still Berkshire is probably the best run property casualty insurance company in the world led by skillful managers like Ajit Jain.

The Coca Cola Co. (KO)
Coca Cola continues to be the leading brand in the beverage industry.  In order to adjust to evolving market trends they just announced a new product called Coca Cola Coffee that will soon be released in 25 global markets.  Their stake in Monster Energy Drinks and focus on healthier beverage options such as Coke Zero continues to pay off.  Despite strong top-line organic revenue growth of 6% in the quarter the company has still trailed Pepsi in the push for healthier drinks.  The company is reinvesting heavily in its brands and enjoys significant economies of scale and unit cost advantages over competitors.  Over the last 8 years Coke has returned over 90% of their free cash flow to investors through share buybacks and dividends.

Is Inflation Dead?

Businessweek recently had a cover entitled “Is Inflation Dead?” In 1979 when stocks were a compelling generational buy at nine times earnings, Businessweek ran a cover “The Death of Equities.” We are seeing the potential for food inflation as China has lost close to a third of their hogs to disease. Ethanol mandates are rising from 10%-15%, boosting corn demand. Most agriculture crops are close to or below cost of production as farm incomes are off nearly 50% from 2013 highs. We could be close to the bottom of a long downturn in agriculture. Shipping costs are climbing as truck driver shortages intensify. Companies such as PepsiCo and Procter & Gamble have been able to raise prices. Pepsi and Procter are  showing some of the best growth in over five years. We can’t predict macro events, but we can intensively research well-managed  companies that have the ability to endure through the most difficult economic environments. Many of our investments have low mandatory capital investment needs, high and growing free cash flow yields and attractive returns on invested capital. This type of model is best in periods of increasing inflation.

Conclusion

While we are encouraged by the market recovery, earnings in general have not been materially improving. In an environment that is enthusiastic about “growth at any price” we remain focused on making careful buys in outstanding businesses, with strong ethical leadership, durable models with solid balance sheets and improving free cash flow. We are looking to buy  at a discount to intrinsic value with the goal of a double or triple play over five to ten years. We believe the pendulum has swung too far in the direction of  money-losing speculative ideas many of which lack sustainable earnings. When asset classes go parabolic  it has been our experience that  an inflection point is close where markets will purge the excesses.

 

We appreciate your trust.

Jeff Auxier

Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses.  This and other information is in the prospectus, a copy of which may be obtained by calling (877) 328-9437 or visiting the Fund’s website.  Please read the prospectus carefully before you invest.

Fund returns (i) assume the reinvestment of all dividends and capital gain distributions and (ii) would have been lower during the period if certain fees and expenses had not been waived.  Performance shown is for the Fund’s Investor Class shares; returns for other share classes will vary.   Performance for Investor Class shares for periods prior to December 10, 2004 reflects performance of the applicable share class of Auxier Focus Fund, a series of Unified Series Trust (the “Predecessor Fund”).  Prior to January 3, 2003, the Predecessor Fund was a series of Ameriprime Funds.  The performance of the Fund’s Investor Class shares for the period prior to December 10, 2004 reflects the expenses of the Predecessor Fund. 

The Fund may invest in value and/or growth stocks. Investments in value stocks are subject to risk that their intrinsic value may never be realized and investments in growth stocks may be susceptible to rapid price swings, especially during periods of economic uncertainty. In addition, the Fund may invest in mid-sized companies which generally carry greater risk than is customarily associated with larger companies. Moreover, if the Fund’s portfolio is overweighted in a sector, any negative development affecting that sector will have a greater impact on the Fund than a fund that is not overweighted in that sector. An increase in interest rates typically causes a fall in the value of a debt security (Fixed-Income Securities Risk) with corresponding changes to the Fund’s value.

Foreside Fund Services, LLC, distributor.

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on 500 widely held common stocks. One cannot invest directly in an index or average.

The views in this shareholder letter were those of the Fund Manager as of the letter’s publication date and may not reflect his views on the date this letter is first distributed or anytime thereafter.  These views are intended to assist readers in understanding the Fund’s investment methodology and do not constitute investment advice.

This Internet site is not an offer to sell or a solicitation of an offer to buy shares of the Fund to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Foreside Fund Services, LLC. Distributor (www.foreside.com) | Hosted by Computer Link Northwest, LLC.