Frank Capital's Private Wealth Commentary

April 2022 – First Quarter Update

Energy, Finance, Passive, US Equities

There is a two-ton anvil of reality dropping on unprofitable companies.

The first quarter of 2022 continued trends from late 2021 as well as establishing great new shifts in the investment world. All of Frank Capital’s separate account strategies had positive returns in Q1 22, far outpacing riskier, growth-at-any-price strategies, as well as the broader market indices.

Interest Rates and Inflation Re-rate Growth

Unprofitable growth stocks peaked towards the middle of 2021, and the first quarter of 2022 battered these issues further. Many Software as a Service companies (SaaS,) high growth IPOs, and pre-revenue green energy companies saw declines of well over 50% from their highs. There is a two-ton anvil of reality dropping unprofitable companies. First, interest rates are blasting-off, and second, Wall Street banks satiated participants’ thirst for these high-concept issues through dubious IPOs and SPACs. Simply, demand decreased while supply increased.

Increased interest rates and inflation make future profits worth less. A dollar today is worth more than a dollar ten years from now, and with inflation printing scary high single digit numbers, future dollars are plummeting in value. Investors want and need cash today.

Value to the Rescue

From dividend payers trading at reasonable valuations, to small and mid-cap energy companies, holdings in our private client accounts have one thing in common: they all produce cash today. Like a lake going from 35 degrees to 30, a small shift in the macro environment towards inflation and rate increases suddenly froze out the high-flying stocks and caused a rush towards value. As we mentioned previously, our value holdings have a crowded entrance. It is difficult for outside investors to buy exposure without materially increases in price. We believe investors lack exposure to the companies we own, and the structural shifts occurring today bolster these issues’ earnings profiles for years to come.

Towards the end of the first quarter, markets were crying out for the Fed to act aggressively! Inflation seems like it is out of control, and the Federal Reserve is more hawkish than any time in recent memory. Some commentators believe the Fed is tightening into a slowdown, which could force the US into recession. As a result, investors are rushing into more defensive names, which are predominantly the value stocks in our client portfolios.

What about Growth?

Please do not mistake our enthusiasm for value as myopia. Older clients will remember we built portfolios full of growth companies trading at reasonable valuations coming out of the Global Financial Crisis in 2008. Though the downturn of 2021 is not nearly as bad at an index level, as mentioned above, most technology companies are down over 50% from their highs. Sifting through the rubble, we took large, long-term positions in two profitable technology companies with phenomenal compounding abilities. These positions will drive client returns over the next several years while balancing portfolios should growth return to the forefront. As for unprofitable companies? Investors may be waiting a long, long time for those to return to their highs, if ever. It is a great time to be a stock-picking firm with the ability to add direct positions in equities and bonds to client portfolios as opposed to blanket positions in ETFs.