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Tandem: Observations 6.27.19

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The fear and volatility we entered the month with seemed to ebb as soon as we flipped the calendar. The VIX fell over 15% in the first week of June as the S&P 500 soared over 4%. And, just like that, the few opportunities we saw in May to put cash to work managed to dry up quickly. However, we were able to take advantage of the rising market to be opportunistic with trimming one position and liquidating another.

After Hormel Foods’ (HRL) most recent earnings call, management’s downbeat top and bottom-line guidance was one of several major inputs that caused our quantitative model to rank the stock a sell. The shares of HRL initially sold off hard, but quickly bounced back as the equity market rallied. HRL clawed its way all the way back to a level that was previously major support, which now subsequently looks to be significant resistance. We were able to take advantage of this opportunity and sold 25% of our HRL position across all our strategies, as mandated by our sell discipline.

In addition to the partial sale of HRL, we also liquidated Celgene (CELG) in our Equity strategy. Over the past several months, we’ve written about the CELG/BMY merger and our strategy to exit CELG given BMY does not meet our fundamental criteria. For much of the leading up to closing, CELG was priced at a significant discount to the announced deal price. This was mostly due to speculation that the deal might not be approved by the shareholders of one or both companies. In the end, the shareholders on both sides blessed the transaction and for the most part the deal has cleared all regulatory hurdles. Therefore, as the doubt over the deal receded, so did the discount to the announced price. The spread, which at one time was nearly 12%, closed to within less than 1%. Since CELG shareholders were getting half of their proceeds paid to them in BMY shares, CELG was now essentially trading in lockstep with BMY. With no dividends being paid to CELG shareholders and the discount spread nearly all the way closed, it made very little sense for us to stick around any longer, so we decided to liquidate our remaining shares.

Although there were not a lot of transactions being done within our strategies, our holdings surely did not shy away from the headlines. On June 10th, United Technologies (UTX) and Raytheon Company (RTN) agreed to an all-stock merger that would create one of the largest aerospace and defense companies. With UTX’s recent acquisition of Rockwell Collins and now proposed merger with RTN, the new company will be the third largest in providing commercial aerospace products and the second largest defense company. Prior to this news, UTX had already announced the separation of its more cyclical businesses – Otis (elevators) and Carrier (HVAC). These spin-offs should give the new business an increased probability of continued growth through any economic cycle. Couple the prospects of continued steady growth, both companies’ long history of growing their dividend and our familiarity with UTX’s current CEO, Gregory Hayes, running the new company, we are poised to keep the new company among our core holdings.

Not to be outdone, AbbVie (ABBV) decided to also make a little noise on June 25th by announcing their intent to acquire Allergan (AGN). AGN is the market leader in beauty drugs with Botox and several popular eye treatments. In addition, there is some overlap in brain treatments, women’s health and stomach disorders between ABBV’s and AGN’s portfolio of therapies. The acquisition is to be paid with a combination of cash and stock for an equity value in AGN of $63B.

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Observations 6.27.19
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