Oliver Luxxe
Market Commentary - 4th Quarter 2019
Equity:
The economic expansion entered its 11th year in July, making it the longest since 1900. This economic expansion has been slow but steady. However the effects of fiscal stimulus from the tax cuts, which boosted growth in 2018, have faded and growth slowed to approximately 2% in 2019. Despite recession risks rising given trade tensions, cyclical sectors of the economy (autos and housing), business investment spending, and consumer confidence do not appear over-extended. Additionally, the labor market remains tight, and inflation is stable, making the case for economic resilience.

Profit growth was extremely strong in 2018, but slowed to low-single digits in 2019. 2020 looks set to achieve low to mid-single digit earnings growth, as profit margins face headwinds from rising wages and input costs, and the U.S. dollar remains a challenge for multinational businesses.

Equity markets moved higher in 2019 and achieved new market highs. Equity valuations seem high in certain pockets of growth stocks. Financials and cyclical sectors appear more attractive. It is important to note that while we closed out 2019 on a strong note, there are still numerous global uncertainties that can cause pockets of volatility.    

Source: Charles Schwab, Bloomberg, Institute for Supply Management (ISM), IHS Markit data as of 12/4/2019. 
Holdings Overview:
Broadcom (AVGO) is a global technology company, which designs, develops and supplies semiconductor and infrastructure software solutions companies. The company operates in two business segments (Semiconductors and Infrastructure Software) in which their end-markets are diversified and driven by secular growth verticals like 5G and data center capital expenditures. AVGO offers less-cyclical exposure to the semiconductor cycle while paying a healthy 4.2% dividend. We remain encouraged by Broadcom’s increasing shift to higher margin infrastructure software, reflecting the CA acquisition and Symantec enterprise deal which provides more recurring revenue and adds to end-market diversity. AVGO’s P/CF and P/S multiples continue to be in-line with 5-year averages which are reflective of a fairly valued, stable free cash flow generating business relative to its competitors.

Builders FirstSource Inc (BLDR) is the largest national lumber and building materials distributor (LBM) in the United States. Coming off an impressive third quarter, the company still has many levers at its disposal to sustain strong organic growth, margin expansion, and market share growth. Some of these levers are the following: 1.) higher lumber prices, 2.) increasing value-added product mix, 3.) deleveraging the balance sheet, and 4.) above industry end-market demand growth (specifically single-family housing). Additionally, BLDR’s relative value proposition remains to be very attractive compared to competitors who are more exposed to commodities (lumber, OSB, and pulp) and less exposed to value-added products and services. On a forward P/E and EV/EBITDA basis, Builders FirstSource trades at 11.5x (vs its 5-year average 12.1x) and 8.6x (vs its 5-year average 14.8x), respectively.

LyondellBasell Industries N.V. (LYB) is the second largest chemical company in the U.S. and among the largest diversified chemical companies in the world. The company operates in Olefins & Polyolefins (O&P), Intermediates and Derivatives (I&D), Advanced Polymer Solutions (APS), Refining, and Technology. Like most cyclical chemical stocks of late, LYB has seen its multiple compress to historic trough-levels due to the trade war, soft polypropylene prices, and a weak European macro. We believe there is value in LyondellBasell for a few reasons: 1.) LYB’s industry leading feed stock advantage (ability to use low-cost ethylene vs higher cost propane/butane), 2.) Double-digit FCF yield which allows for substantial buybacks and dividend growth, 3.) Organic growth opportunities are projected to add +$200mn in EBITDA by 2021 from its Hyper zone HDPE and PO/TBA facilities, and 4.) IMO2020 regulation has the ability to lift LYB’s Refinery segment to $300mn in EBITDA from recent break-even levels.

Fixed Income:
We have seen solid progress within our short call strategy that started in the middle of June last summer. This strategy involves buying callable bonds that are not getting called at first chance by the issuer. The primary question we ask to inform our buying decision involves the issuers ability to borrow at a lower interest rate than the rate carried by the outstanding bonds.

Prices of these bonds are potentially favorable as investors expect these issues to be called. This strategy has defensive qualities in a rising interest rate environment, although we are not holding our breath while waiting for this potential outcome. This strategy could compare favorable to longer term investments.

Rates will change, and without much warning. As such, we will continue to look for roll down as well as short call opportunities with a goal of maximizing yield and minimizing interest rate risk.
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Outlook:
At this time last year the market was in the midst of a sharp decline in prices due to fears of a global recession. The markets had experienced a period of high volatility due to a variety of reasons from US / China Trade concerns, slowdown in global growth, and Federal Reserve interest rate policies. We reiterated that fundamentals were solid, with the US economy seeing above average economic growth led by corporate earnings, job growth, business and consumer spending. Importantly we stated that stock valuations were becoming increasingly attractive within our disciplined value approach. Using the volatility to our advantage, we were able to acquire high quality businesses for our clients equity portfolios at opportunistic prices, and was highly rewarded.

As we enter 2020 we are in an environment that has seen a sharp increase in equity prices due to a decrease in recessionary fear. The markets have also experienced a period of low volatility due to a variety of reasons from a new US / China Trade deal, improvement in global growth, and lower interest rates provided by the Federal Reserve.

We believe the recent equity market improvement in equity prices should act as a reminder that stocks can experience periods of sharp volatility both upward and downward in the short-term. However, business fundamentals and valuations are what drives equity prices in the long run. We continue to follow our investment process using a combination of quantitative and qualitative factors to identify what we believe to be undervalued companies. Given the positive outlook for consumer spending growth in 2020, recent improvement in PMI data, and low interest rate environment we continue to have a positive outlook on the equity market.
As always please reach out with any questions or concerns.

Thank you,

Joseph Sharma, CFA
Chief Investment Officer
Direct: (908) 741-8340
Oliver Luxxe Assets, LLC is a SEC-Registered Investment Adviser. A copy of the Firm’s Current Disclosure Brochure can be found on the SEC’s IAPD site ( https://adviserinfo.sec.gov/IAPD) or may be requested at any time by contacting us.

Significant risk may accompany investments in stocks, bonds or other asset classes over short periods of time. Investment return and principal value will fluctuate with changes in market conditions. Your investment may be worth more or less than your original cost.

Past performance is not indicative of future results.

This report is a publication of Oliver Luxxe LLC. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of subjects discussed. All expressions of opinion reflect judgment of author as of date of publication and are subject to change. Information contained herein does not involve rendering of investment advice. A professional adviser should be consulted before implementing any of strategies presented. Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell securities mentioned herein. Different types of investments involve varying degrees of risk. Economic factors, market conditions, and investment strategies will affect performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements relating to objectives, opportunities, and future performance of U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “should,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to economic conditions, changing levels of competition in industries and markets, changes in interest rates, and other economic, governmental, regulatory and other factors affecting a portfolio’s operations that could cause results to differ materially from projected results. Such statements are forward-looking in nature and involve known and unknown risks, uncertainties and factors, actual results may differ materially from those reflected in forward-looking statements. Investors cautioned not to place undue reliance on forward-looking statements / examples. None of Oliver Luxxe LLC or any affiliates, principals nor any other individual / entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.