The Recession That Never Was – 1Q’19 Mott Capital Investor Letter

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

April 26, 2019

The Recession That Never Was – 1Q’19

For the broader market, the first quarter of 2019 was the best annual start in nearly twenty years.  I am happy to report that Mott Capital also achieved the strongest first quarter in the nearly five years since the inception of our investment strategy. During the quarter the Mott Thematic Growth Composite rose by 14.8% net of fees and transaction costs, beating the S&P 500 total return index gain of 13.65%, and the S&P 500’s advance of 13.1%.

Returns for First Quarter 2019

Thematic Growth +14.8% S&P 500 Total Return +13.7% S&P 500 +13.1%

Overblown Fears

The concerns that were overhanging the end of the 2018 fourth quarter, including fears of a global economic slowdown and potential recession, melted away with the spring thaw. All it took was the Fed easing back on monetary policy to send stocks sharply higher. My last quarterly report suggested that the S&P 500 could rise to over 3,000.  That comment may have seemed a bit crazy when I wrote it — at the time S&P was 17% below that goal — but as I write this note the S&P is less than 3% away from that reality. We have come a long way in a very brief time.

The market signals continue to suggest that the global economy is not heading towards a recession. Data revealed on April 26 showed that first quarter US GDP increased by 3.2%, better than estimates of 2.5% and faster than last year’s first quarter growth of 2.2%.  One wonders where the recession fears even came from. Surprisingly, even growth in China was strong, with its first quarter GDP rising by 6.4%, just ahead of consensus estimates of 6.3%.

Based on the dire predictions of many analysts at the start of the quarter, an inevitable recession was brewing and would take hold in the first part of this year.  Maybe in Fantasyland, but certainly not in the US economy.  Those same analysts predicted that the first quarter of 2019 would show the slowest growth and define a potential trough in the current cycle. The strong GDP growth during the quarter gives a very different message: most growth estimates for the balance of 2019 may well be too low.

Performance

Top 3 Best and Worst Performers for 1Q’19

Acadia Pharmaceuticals +66.05% Tesla (TSLAWealth Strength IndexAAPL is Extremely Up and trending Up) -15.9%
Netflix (NFLXWealth Strength IndexAAPL is Extremely Up and trending Up) +33.21% Splunk (SPLK) -1.90%
Mastercard (MA) +24.81% Disney (DIS) +1.26%

During the quarter only two stocks finished lower, while the others all finished higher.

ACAD

Shares of Acadia Pharmaceuticals led the rebound, rising 66%. The company reported solid fourth quarter and full year revenue for 2018 and provided favorable revenue guidance for the remainder of 2019, as Nuplazid sales for Parkinson Disease Psychosis remain strong.  Additionally, the company will have several big data read-outs this year that could provide further expansion of the drug’s indications and increase revenue.

NFLXWealth Strength IndexAAPL is Extremely Up and trending Up

Netflix surged by over 33% as it continues to deliver strong subscriber growth expanding into international markets. The total subscriber base is now approaching 150 million.  Recently Disney, another one of our holdings, revealed a direct to the consumer streaming app. However, I do not believe that Disney entrance will hurt or slow down Netflix growth. While Disney’s media service will be limited to Disney content (including the recently acquired 20th Century Fox assets), Netflix will continue to offer the widest range of content for all audiences.

MA

Mastercard jumped by almost 25% in the quarter as the company continues to deliver strong revenue and earnings growth.  As I have pointed out in the past, the move to a “cashless” economy implies an ever-increasing number of transactions for debit and credit intermediaries.  MasterCard’s growth is unlikely to slow any time soon.

TSLAWealth Strength IndexAAPL is Extremely Up and trending Up

Tesla dropped by over 15% in the quarter as the company continues to push the delivery of Model 3 to China and Europe, creating logistic issues. This extension of market focus resulted in the company producing a total of 77,100 vehicles, but only delivering 63,000.  I continue to believe that Tesla, with leading-edge energy storage technology and benefitting from a maturing assembly and logistics platform, is changing the automotive landscape.

New Positions

During the first quarter of 2019, I added Splunk (SPLK) to the portfolio. The company is in the business of data analytics and security for cloud computing services (including Amazon Web Services), an area of business that is rapidly growing and likely will have many years of future growth.  Since it was added to the portfolio, the stock was the second worst loser, falling 1.9%, but the decline had more to do with the entry point in the middle of the quarter, and not because of anything wrong with the business fundamentals. I am very excited to have Splunk to our holdings; I carefully tracked the stock during the last three quarters of 2018, and I am confident that it will be a source of growth for the portfolio for the foreseeable future.

We also added Cisco Systems (CSCOWealth Strength IndexAAPL is Extremely Up and trending Up), an old-time technology stock that has a very bright future. The company makes much of the equipment that is needed for the rollout of the fifth generation of wireless technology –5G. Additionally, one of its chief rivals in the space is the China-based Huawei; the US concern with the possible security vulnerabilities of Huawei products and the limitations being put on the use of Huawei’s equipment and technology could provide a huge tailwind to Cisco.

Also, as I noted in the fourth quarter letter, I added shares of Microsoft (MSFTWealth Strength IndexAAPL is Extremely Up and trending Up) to the portfolio. The stock’s performance this quarter has thus far exceeded my expectations. I am very excited about its positioning in cloud computing as the main rival to Amazon’s Web Service.

The Reshuffle

At this point the portfolio reshuffle is complete, and unless there is unexpected information that changes my opinion on a current portfolio holding, I do not expect to make any additional changes in 2019. I realize the number of changes such as I made in the first quarter of 2019 does not occur often, but the market downdraft at the end of last year created too many opportunities.  As a result of changes in stock prices and account balances, the portfolio size has now been reduced to 17 stocks.

Business Updates

I appreciate the extension of the trust you afforded me during the rough fourth quarter of 2018. As noted in my last quarterly report, sharp drawdowns like we experienced at the end of 2018 don’t happen often. I believe you can see from this quarterly report that my expectations are for continued improvement in the markets during the balance of 2019.

As always, I will continue to work my hardest to find new long-term thematic investments that are helping to reshape generational and demographic shifts, all in line with our investing discipline.

-Mike

Michael Kramer

Founder/Portfolio Manager

Mott Capital Management, LLC

Michael@mottcapitalmanagement.com

516-642-5788

N.A. – Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.

  Performance reflects the non-annualized performance from 8/1/2014 to 12/31/2014.

** For periods with less than 36 months of composite performance, no 3-year ex-post standard deviation measurement is available.

The Recession That Never Was – 1Q’19 Mott Capital Management Investor Letter

Disclosure: Mott Capital Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.

Mott Capital Management, LLC (“Mott”) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards.  Mott has not been independently verified.  The Thematic Growth Composite is a blend strategy of different market capitalizations, which is approximately divided equally among three sectors.  The Core Growth sector includes large multi-national companies, the Growth Sector includes mid- to large-cap companies, and the Aggressive Growth sector includes small- to mid-cap companies.  The strategy is concentrated, and typically includes approximately 20 positions, and 5% cash.  The strategy only invests in stocks, ADRs, and ETFs denominated in USD.  The All-Cap Growth Composite was created June 2015. The S&P 500 is a free-float capitalization-weighted index of 500 large-cap common stocks actively traded in the United States.  The index is shown as a general market indicator and may not reflect the same exposures as the composite. The investment management fee schedule for the composite is 2% on the first $250,000, 1.5% on the next $750,000, and 1.0% on the remainder.  Actual investment advisory fees incurred by clients may vary.  Further information regarding investment advisory fees is described in Part II of the firm’s Form ADV. Past performance is not indicative of future results.  The U.S. Dollar is the currency used to express

performance.  Performance shown represents total returns that include income, realized and unrealized gains and losses.  Net of fee performance was calculated using actual fees.  Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains.  Withholding taxes may vary according to the investor’s domicile.  Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The annual composite dispersion presented is an asset-weighted standard deviation calculated using accounts in the composite the entire year.  The 3-Year Standard Deviation represents the annualized standard deviation of actual composite and benchmark returns, using the rolling 36-months ended each year-end.  The 3-Year ex-post Standard Deviation of composite and benchmark returns is not presented because the composite strategy has less than three years of history.