The lopsided market performance brought an end to what had been a five month streak for the American Resilience portfolio outperforming the S&P 500 Index.
The best performers in the portfolio in December were Visa (V), which returned 0.3%; Thermo Fisher Scientific (TMO), which returned -2%; and S&P Global (SPGI), which returned -5%.
The worst performing stocks in the portfolio were GXO Logistics (GXO), which returned -28%; Air Products & Chemicals (APD), which returned -13%; and Eaton (ETN), which returned -12%.
The Visa investment case
V was a rare stock that did not see downside in December and closed the year with a strong 22% total return. V shares have performed especially well since the election, generating a 9% total return between 10/31/2024 and 12/31/2024, versus 3% for the S&P 500.
V continues to benefit from a number of powerful structural drivers. The best way to think of V is as a toll collector in the vast global consumer economy.
V not only wins as the economy grows and consumers spend more, it benefits from inflation because it is ultimately just a middleman taking a percentage of transactions.
V’s revenues grow with nominal growth in the economy. If the entree at your favorite restaurant is 25% more expensive than it was 4 years ago, that is bad for you but good for V shareholders.
Similar to what we have written about Costco (COST), the bottom half of American households may be suffering, but the affluent are doing well, in no small part due to inflation-driven wealth effects.
With significantly more disposable income, affluent consumers naturally spend a great deal more on their credit cards than the average consumer and are a more relevant demographic for a company like V.
Residential housing prices and the stock market have risen sharply in recent years. These wealth effects are manifesting themselves in strong consumer spending, including areas like travel, and are supporting V’s double digit earnings growth trajectory.
V is not just a play on overall consumer spending. It also benefits from key changes that are taking place within the consumer landscape. These changes enable V to grow its revenues faster than the overall consumer economy.
First, there is an ongoing generational shift away from cash and checks to digital payments. Second, there are the continued market share gains within retail by e-commerce platforms, which rely heavily on credit card networks.
As cryptocurrency adoption grows, the credit card industry is sometimes depicted as a long-term loser. In this context, it is important not to paint the credit card industry with too broad a brush.
It is true that cryptocurrencies like Bitcoin (and the second layer payment networks that are being built on top of them) can lead to more efficient systems of digital payment. But these innovations will likely be more detrimental to banks and other financial institutions than payment network operators like V, which are in fact leading the charge in crypto adoption.
A typical credit card transaction can involve 2.5% to 3.5% of fees to the merchant, but only about 0.15% goes to a payment network like V. The vast majority is collected by the bank that issues the credit card and is effectively lending money to the consumer for a short time period.
The far-reaching global payment infrastructure that V has built over the decades is highly efficient and extraordinarily difficult to reproduce. As crypto-based transactions grow in importance, V stands to benefit with its already entrenched platform to support these transactions.
While the Bitcoin network, for example, is an exceptionally secure and efficient technology to execute larger financial transactions without third party involvement, it does not have the capacity to process the enormous number of small transactions that credit cards are used for everyday.
For perspective, the Bitcoin network currently processes a few hundred thousand transactions daily, whereas V processes around 150 million transactions per day.
One of the reasons V shares have outperformed since the election is that the Trump administration is expected to provide digital payment companies like V a more favorable regulatory environment.
V has been an active acquirer of crypto as well as AI-related fintech start-ups. From an antitrust perspective, the company will likely have more latitude to continue in this direction under Trump.
Crypto has the potential to be highly disruptive to the financial services industry, but we see V as a beneficiary of this phenomenon, whereas traditional financial institutions like banks may find themselves on the losing end.
TMO and SPGI have relatively defensive recurring business models and therefore held up better in December as market sentiment shifted negative.
By far the worst performing stock in the portfolio was GXO.
Shares of GXO had rallied after news reports that the company was receiving acquisition proposals. Unfortunately, it was later reported that the company’s board decided to reject these offers and stay independent.
The company has a unique business model and set of assets within the logistics space. We would not rule out the possibility of GXO ultimately getting acquired down the road.
The very weak performance of GXO in December is a function of event-driven investors dumping their shares after the M&A opportunity fell apart as well as the broader weakness in cyclical sectors.
We continue to like the stock as a long-term investment, especially at these depressed levels, but are staying with our 5% weighting given its relatively small size and cyclical character.
The performance of APD and ETN in December was largely in line with the weakness observed in the Materials and Industrials sectors rather than company specific factors.
A very good year for stocks definitely ended on a sour note. However, we believe the interest rate-driven decline in share prices now makes our portfolio holdings more attractive, not less.
