June 2020 : HNW Equity Rebalance

by | Jul 1, 2020 | Rebalance Rationales

HNW Holdings Update

The HNW sleeve is designed to give equity exposure to a group of individual stocks that we think offer attractive prospects through a combination of yield, growth, quality, and reasonable valuations vs the S&P.



CHEMED Corporation (CHE) operates in two distinct business – one of the largest hospice operators (Vitas) and the largest provider of plumbing and drain cleaning services in the U.S. (Roto-Rooter). VITAS derives roughly two-thirds of Chemed’s total sales, and Roto-Rooter the remaining one-third.

We believe that CHE is a very strong operator with tailwinds on both sides of its business. On the Roto-Rooter segment, given its above peer margins, its asset-light model, the reduced exposure to economic cycles (due to its growing exposure to water restoration), and limited online competition, we believe that this line of business deserves an above-average premium relative to peers. Meanwhile, given the size of the VITAS platform (scarcity value), the positive outlook for the hospice industry, and the positive near- and medium-term outlook for Medicare reimbursement rates, we believe that VITAS also deserve an above-average premium relative to peers.

We believe CHE has proven to be a very strong operator, with minimal leverage at the corporate level, a growing dividend, and accretive share repurchases. With this, we believe that the company is very undervalued relative to peers, and should be an all-weather holding in a portfolio given its downside protection along with its outperformance in normalized market scenarios.


Even though it has rebounded strong off the market’s low, we decided to sell Packaging Corporation of America (PKG), as our revised growth rate did not meet what we believe to be rigorous credentials to be considered for the HNW sleeve. PKG has performed well vs peers despite the current industry headwinds. But, the combination of low-upside to current valuations, combined with the very likely possibility that earnings may continued to be capped in the near future, given pricing concessions and lower volumes due to mill outages, drove us to reducing our growth rate, and ultimately selling the stock.




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