The Inflation Protection portfolio’s performance in May was driven by WESCO International (WCC), which returned 18%; Costco (COST), which returned 12%; and TransDigm (TDG), which returned 8%.
These positive contributions were somewhat offset by a -4% return from Brown-Forman (BF).
WCC rebounded sharply after over-participating in the broader April decline in stock prices. We note with interest that Baupost, the hedge fund run by famed value investor Seth Klarman, initiated a position in WCC during the month.
COST benefited from a strong earnings print, with market share gains and high membership renewals. This led to a wave of analyst target price increases.
COST was recently profiled in the Financial Times for its success as an “inflation wave winner.” Rising prices generally benefit retailers, who earn a margin on the nominal cost of goods sold. But COST in particular has done well because of its ability to deliver value as household budgets are squeezed.
COST also benefits from commercial positioning that tilts towards relatively more affluent consumers, who are less pinched economically than middle and lower income consumers. COST’s successful program of selling gold bars online demonstrates that it continues to have its finger on the pulse of consumer trends.
TDG shares similarly advanced following a strong earnings result and outlook earlier in May.
BF continues to struggle somewhat, with muted spirits demand which is in part attributable to household liquor levels still elevated from the pandemic buying wave. We are still attracted to the structural growth, pricing and premiumization opportunity for BF, especially in the whiskey category.