Blue Chip Trio: Hotels, Pharma and Cable
06/13/2016 10:00 am EST
John Augustine, chief investment officer with The Huntington Bank, talks with us about his firm's asset allocation strategy, his current outlook for markets and a trio of favorite blue chip stocks — a leading hotelier, a blue chip play on oncology and a turnaround in the media and cable sector.
Steve Halpern: Our special guest today is John Augustine, chief investment officer with The Huntington Bank, which has over $12 billion in assets under management. How are you doing today, John?
John Augustine: Very well, thank you.
Steve Halpern: Well, thank you for taking the time. First, could you discuss your current overall asset allocation and walk us through some of the more important factors that you consider when determining that allocation?
John Augustine: Yes, in asset allocation, we have a team that meets monthly, our investment strategy team, and they’re generally trying to grade several different areas.
They’re trying to grade in overall stocks, bond, cash environment, using both quantitative and qualitative input, then trying to get down into different stock groups after that.
In other words, should we deviate from our standard, large-cap domestic, reference index the S&P 500? Should we stick with that? Should we go international?
So those kind of questions in the equity allocation perspective, and then from the fixed income allocation perspective.
It’s a matter of where you want to be on the yield curve and what kind of credit quality you want to be in, as we generally stay domestic in fixed income for our clients here in the heartland of the US Midwest.
So those are generally the items that we look at when that team goes through monthly to try to give the best view to our client portfolios that we can.
Steve Halpern: Now, you’ve recently moved from a market neutral stance to a slightly overweight position in regards to equities. Could you explain the reasoning behind this move?
John Augustine: Yes, we did that. Good observation. In February, early February, when that team met, as mentioned, we just weren’t sure of the environment, my colleagues and I, and what we wanted to try to achieve in this environment; remember, we were coming off a very, very downbeat January for markets.
We were coming off a rising economic concerns, and we were coming off of increased volatility in currency markets, which, in our world, in our view, leads to increased volatility in all markets, so in early February, we did something relatively unusual by going to a market neutral addition to the portfolios via mutual funds.
We used three different mutual funds to offer that to our portfolio managers for client accounts. Now, in trying to do that, what we were trying to do was stay away from, number one, cash.
We wanted to get some yield, so we were favoring a type of fund that would pay some dividend yield, because we didn’t know how long we’d be there at that point in time.
And then, secondarily, to obviously try to protect principal during a time where we really didn’t know what the outcome was going to be, oil down at $26 a barrel, etc., so that was something relatively new for us.
Now, fast forward over the past 30 days, what we’ve seen is markets generally all move up together, and why did they do that?
Well, in our view, the economic and the earning stories are actually getting slightly better for the second half of this year, and we just have not had the bad news materialize that we were concerned about in February — let’s say through parts of April and even into mid-May.
So the past 30 days, we’ve seen a noticeable change in tone in the macro environment, and we’ve seen the noticeable firming in the earnings environment for the second half of this year.
Markets seem to be responding to that in unison, and when markets tell us that that strong, pretty much across all markets, we need to react and try to be as proactive as we can for our clients, even though we only meet monthly, and that’s where that market neutral call came off.
It just hasn’t been the bad news materialize that we were concerned about in the first quarter.
Steve Halpern: Now, as you alluded to earlier, your largest current allocation is to domestic large-cap stocks, and among the blue chip stocks you currently favor is Marriott International (MAR). Can you tell us a little about the story here?
John Augustine: Yeah, Marriott to us is a reversal story for the second half of the year. Marriott has trailed the major indexes, in this case the S&P 500 and its sector for the year-to-date period, primarily, we think, due to its proposed acquisition, Starwood Hotels (HOT).
Now, there’s still some hurdles to go through, some approvals to be done for that acquisition, but our equity team has a view that that acquisition is going to get done, and it is going to be enhancing to not only Marriott’s balance sheet, but Marriott’s income statement, translate into higher EPS.
So it’s a story, a reversal story, we’re looking for in the second half of the year. We recently moved into that position during the second quarter.
Steve Halpern: Now, in the pharmaceutical area, you point to Bristol-Myers Squibb (BMY). What’s the attraction here?
John Augustine: Bristol-Myers Squibb, to our equity team, and to us, is a success story. They have had a great deal of success in an area of healthcare called immuno-oncology, which is the treatment of cancer, primarily by enhancing the body’s own immune system to fight cancer cells.
They’ve been very successful in this area. The stock itself has reacted to this success over the past three months.
They’re pouring, we believe, a great deal on a relative basis of money into their R&D.
And over the past two years, their investment in R&D has paid off, specifically in this space we’re talking about, immuno-oncology, which we think is going to take earnings higher for at least the next two to three years.
So we view Bristol-Meyers as a success story within the healthcare sector that we’re going to stay with, we hope, for the long-term.
Steve Halpern: Now, finally, you recommend an overweight position in the media firm Comcast (CMCSA). Could you share your reasoning behind this idea?
John Augustine: Yes, Comcast is a trend change story to us, so in other words, media has been in the spotlight of the stock market, primarily to the downside, for much of 2015.
Now, we saw some reversal in some media stock, think of content stocks, during the, let’s say the first five months of this year.
Comcast itself is a cable story, part cable, part networks story with some content through its recent acquisition of DreamWorks.
We think customers are going to come back their way, i.e. the cable, as now we’ve had DirecTV acquired, and we’ve had the phone companies seemingly a little bit back off of their plans for cable into the home.
We think Comcast is going to be a beneficiary of a trends change, and now a recent change within Time Warner Cable (TWC) itself that customers are going to come back to cable; they’re well positioned for it.
We think that’s going to grow earnings for the company, mixed with some of the content they have to provide, as well, so it’s a trends story, we think. Comcast has legs to it from a media trend standpoint.
Steve Halpern: Again, our guest is John Augustine of the Huntington Bank. Thank you so much for your time today.