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CDT Capital Management
Summary
- In May, the S&P Total Return index was up almost +5%, a bounce back and some, but we question the foundation for which this move up is built.
- According to the folks at S&P Down Jones Indices (link), Q1 earnings per share for the S&P 500 index were up just +4.7%, below the 25-year average of +7%.
- Insiders are middling. Sentiment generally has been oscillating between dour to normal with some breakouts of excitement that prove transitory.
Monthly Update
April rains bring May rallies. April’s -4.1% drawback in the S&P 500 proved to be a very brief interlude for the insistent 2024 market rally. In May, the S&P Total Return index (SP500TR) was up almost +5%, a bounce back and some, but we question the foundation for which this move up is built.
As we exited May, we also exited our first earnings season of 2024, a time when corporate America is forced to show us their hands and the results were fine.
According to the folks at S&P Down Jones Indices, Q1 earnings per share for the S&P 500 index were up just +4.7%, below the 25-year average of +7%, not an awful outcome, but certainly not great.
The concern is current valuations are historically awesome and awesome valuations require awesome earnings. Note, awesome valuations and awesome earnings are technical terms.
At 23.4x 2024 normal earnings, +4.7% EPS growth is not going to cut it. Looking forward, S&P forecasts total EPS growth of +13% for 2024, almost double the historical average; however, by our measure that call is looking more dubious. Over the course of the last month, there was a bevy of data points that are confirming a slowdown in economic growth.
Above the Clouds
Insiders are middling. Sentiment generally has been oscillating between dour to normal with some breakouts of excitement that prove transitory. The signal on the TV has a bit of static, but the message is clear, caution ahead.
The most well-informed group on the planet about the health of the economy seems at best in different with perhaps a slight positive bias and at worst confused. Following the chart above (the blue lines), all year, the sentiment has appeared almost rhythmic in its oscillations, but historically suggests that we would expect a smoother, more leveled reading of sentient through time.
We posit that in a market dominated by a handful of AI or AI-adjacent companies mixed into an economy of competing crosscurrents of highly stimulative fiscal policy (CHIPS & Infrastructure Acts) and highly restrictive monetary policy make even insiders question the current situation.
Despite the mixed picture, insiders continue to fish for value, particularly in defensive places of the market, most recently in healthcare. Below are the five companies that round out our total healthcare exposure with Walgreens (WBA), CVS (CVS) and Cencora (COR) taking lead roles and the others playing supportive parts.
As a whole, the valuations and predictability of their respective healthcare businesses are particularly attractive, especially in relation to an uncertain economic backdrop and expensive market.
In our portfolio, utilities, particularly, The AES Corporation (AES) has a similar set-up and serves the dual function of value and predictability we explored in our last monthly update. We note that AES’s +21% gain drove a substantial part of our returns for the month of May, a reminder that boring companies can have exciting returns.
Going forward, we will continue to execute our plan for exercising more caution. Insider activity is fine, valuations are hot and economic activity is cooling, it is a mixed bag of positives and negatives.
In that context, we will do what we always do and let the insiders lead us to the parts of the market that are underappreciated and unloved, which are mostly in defensive names, a prudent strategy for the moment.
How it Works
Objective: Predictive model that measures the historical relationship between insider sentiment and the future probability of downside volatility (risk).
Insider Trading Activity: Purchase activity of an insider’s own stock filtered by proprietary parameters to scrub noisy data.
Insight: Executive-level insider sentiment is an indicator of near-term financial market risk.
- Low executive sentiment suggests a high level of risk.
- High executive sentiment suggests a low level of risk.
Scale: A ratio of current insider trading activity in relation to historical patterns.
- (0 to ∞) with a historical median measure of 1
- Below 1 implies an above normal level of risk.
- Above 1 implies a below normal level of risk.
Frequency: The measure is updated daily and has historically been subject to swift and possibly extreme shifts.
*This webpage is updated monthly and provides just a snapshot of the most recent month-end.
Disclosures
This presentation does not constitute investment advice or a recommendation. The publisher of this report, CDT Capital Management, LLC (“CDT”) is not a registered investment advisor. Additionally, the presentation does not constitute an offer to sell nor the solicitation of an offer to buy interests in CDT’s advised fund, CDT Capital VNAV, LLC (“The Fund”) or related entities and may not be relied upon in connection with the purchase or sale of any security. Any offer or solicitation of an offer to buy an interest in the Fund or related entities will only be made by means of delivery of a detailed Term Sheet, Amended and Restated Limited Liability Company Agreement and Subscription Agreement, which collectively contain a description of the material terms (including, without limitation, risk factors, conflicts of interest and fees and charges) relating to such investment and only in those jurisdictions where permitted by applicable law. You are cautioned against using this information as the basis for making a decision to purchase any security.
Certain information, opinions and statistical data relating to the industry and general market trends and conditions contained in this presentation were obtained or derived from third-party sources believed to be reliable, but CDT or related entities make any representation that such information is accurate or complete. You should not rely on this presentation as the basis upon which to make any investment decision. To the extent that you rely on this presentation in connection with any investment decision, you do so at your own risk. This presentation does not purport to be complete on any topic addressed. The information in this presentation is provided to you as of the date(s) indicated, and CDT intends to update the information after its distribution, even in the event that the information becomes materially inaccurate. Certain information contained in this presentation includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results, and such differences may be material.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
CDT Capital Management
CDT Capital Management is an unlevered, long-only U.S. equities hedge fund specializing in decoding insider activity. With unfettered real-time access to operations, we believe that corporate insiders possess and routinely exploit an asymmetric information advantage over the rest of the market. Our value investing approach aims to tap this rich source of information by incorporating extraordinary insider activity into the fabric of the CDT investment and risk management strategy. Founded in 2017, CDT Capital Management operates out of New York City.
