Investing During Heightened Volatility

Dana Maury |



In response to inflation currently running at 6% to 7%, the Federal Reserve kicked off an expected series of interest rate increases by raising the fed funds ratei by a quarter percentage point. The Fed’s announcement on February 16 included an acceleration of anticipated rate increases. The last guidance given back in December was four 25-point (one quarter of one percent) increases by the end of this year. The new forecast is now seven increases, plus another four rate hikes in 2023.

Staying invested, one will experience ups and downs, but, historically, investors who are willing to hold stocks for the long-term and endure volatility will be rewarded.    

Fed officials and many economists misjudged inflation last year, labeling it transitory. The blame for higher prices was pinned on supply chain bottlenecks that would resolve themselves as the pandemic ebbed. As we have pointed out in previous letters, other factors (in addition to disruptions from the pandemic) have the potential to create inflation, such as the growth in the money supply. The money supply, measured by M2ii, is up over 41% since February 2020. Even through January 2022, after three months of “tapering”iii bond purchases by the Fed, M2 was still up 12.5% from a year earlier. 


The Fed must now balance attempting to rein in inflationary pressures with rate hikes without triggering an economic slowdown. Raising rates too quickly could reduce loan demand and thereby economic activity. The war in Ukraine and its impact on energy prices and renewed lockdowns in China have further added to inflationary pressures. Consumers are particularly sensitive to gas prices, which have jumped from less than $3.00 a gallon to over $4.00 in the last year. Higher interest rates also have had a negative impact on the valuation of financial assets in general.

All of these considerations and the resulting uncertainty have led to a higher level of volatility in the financial markets. One course of action to avoid volatility is to try to time the market by trading around events that can negatively impact the market. However, academic studies have consistently shown that investors who try to time the market expose themselves to higher risk and make less money. British fund manager and financial author Terry Smith once quipped that there are only two types of investors: “those who can’t market time, and those who don’t know they can’t market time.”  

A recent studyiv from the University of British Columbia’s business school, published in 2021, affirmed that trading in and out of the market to avoid volatility often leads to lower returns than a buy and hold discipline. The paper examined nearly 100 years of American Stock Exchange, Nasdaq Stock Market and New York Stock Exchange data from 1925 to 2018. The research revealed that active investors experienced almost 50% higher volatility than those experienced by buy and hold participants. The effect was greater over longer intervals of time. The takeaway is that investors who try to reduce volatility by actively trading often mistime their purchases and sales leading to lower returns and higher risk.

Misjudging market timing is not the trader’s only dilemma; taxes must be paid on any gains, and there is always the opportunity cost of being out of the market. Historically, the market has gone up more years than not. On average, the Standard and Poor's (S&P) 500 has increased two out of every three years from 1871 to 2015. This fact creates a hurdle for any timing strategy, because spending time out of the market risks missing out on sudden rebounds that are crucial to achieving the long-term rates of return. Research from Jeremey Siegal, noted professor of Finance at Wharton, has shown the stock market on average, over long time periods, has returned 6.5% to 7% a year.

Wars come to an end. Inflation, employment and GDP growth factors change. And administrations come and go. Experts cannot predict one future quarter’s inflation rate, much less the direction of a highly complex economy. Staying invested, one will experience ups and downs, but, historically, investors who are willing to hold stocks for the long term and endure volatility will be rewarded.

i The target rate set by the Federal Open market Committee at which commercial banks borrow and lend their excess reserves to each other overnight.

iI M2 is a measure of the money supply that includes cash, checking deposits and easily convertible near money, such as money market funds and certificates of deposits.

iii Tapering is how the Federal Reserve’s reduces economic stimulus by slowing its bond purchases. When the Fed purchases bonds it injects money into the economy.


March 28, 2022



Company Comments

Comments follow regarding common stocks of interest to clients with stock portfolios managed by Delta Asset Management. This commentary is not a recommendation to purchase or sell but a summary of Delta’s review during the quarter. 

Baxter International Inc.  { BAX }

Baxter International provides a broad portfolio of essential renal and hospital products, including acute and chronic dialysis, IV solutions and administrative sets, infusion systems and devices, nutrition therapies, biosurgery products and inhaled anesthetics as well as pharmacy compounding, drug formulations and software and service technologies. 

The company’s global footprint and the critical nature of its products and services play a key role in expanding access to healthcare in emerging markets and developed countries. Baxter is among the global market share leaders in all its businesses with manufacturing in 20 countries and products and systems sold in 100 countries. The company’s good manufacturing scale with worldwide distribution and product breadth in injectable and inhaled therapies make the firm a vital supplier to caregivers.

Baxter’s medical delivery and dialysis businesses are comprised of a diversified mix of both basic and innovative products. The company maintains large global market shares in mature but stable products, such as IV administered therapies, infusion systems and nutritional solutions. Baxter offers the broadest selection of pre-mixed drugs in the industry and continues to expand revenue from innovative drugs, such as inhaled anesthesia. The renal division, its largest business, should continue to benefit from strong dialysis market growth due to rising global rates of diabetes. The consumable and medically necessary nature of Baxter’s products provides relatively consistent revenue and operating cash flow.

Baxter has created a strategy centered around portfolio optimization, operational excellence and strategic capital allocation. The company’s plan to continue to drive sales growth and profit margin improvement includes management’s focus on the anticipated growth of several high margin businesses -- Biosurgery, Nutrition, Acute Renal Therapy and Inhaled Anesthesia – as well as exiting certain low margin businesses. The company also will continue to reduce its manufacturing footprint and capture additional supply chain efficiencies. Execution of this long-term strategy has already led to substantial profit improvement, and we expect further profit and free cash flow gains in the years ahead.

Baxter offers the broadest selection of pre-mixed drugs
in the industry and continues
to expand revenue from innovative drugs, such as inhaled anesthesia.

In 2021, Baxter purchased Hillrom, a company that makes digitally equipped hospital beds and operating room equipment. There is potential revenue synergy in that Baxter’s products already sell into hospital and clinical settings. Baxter’s salesforce should be an advantage for Hillrom’s products to expand further into international markets, which represent 59% of Baxter’s sales but only 32% of Hillrom’s.


The company continues to invest in internal growth opportunities with a robust pipeline of new products and services. This investment includes a $100 million expansion of its BioPharma Solutions facility in Germany to expand the company’s manufacturing footprint with state-of-the-art equipment to extend the shelf life and stability of pharmaceuticals as well as the global launch of PrisMax2 which is designed to deliver continuous renal replacement therapy and organ support therapies.

Baxter’s main challenge is continuing its efforts to contain costs in the healthcare industry in general that may exert pricing pressure on medical products. In addition to government regulation, managed care organizations’ purchasing power has strengthened due to their consolidation into fewer, larger organizations with a growing number of enrolled patients. Quality control is also a risk factor. Product recalls can harm relationship trust. Baxter also faces regulatory risk. Many of its products are subject to approval by the Food and Drug Administration (FDA) and regulatory agencies in other countries. 

During the COVID-19 pandemic, some of Baxter’s segments initially were negatively impacted by the dramatic decline of elective surgeries, particularly in mid-2020. The company has seen surgical volumes improving and expects trends to improve into 2022. Underscoring the recovering outlook, the company’s free cash flow improved by 27% in 2021.

We believe Baxter can generate long-term revenue growth in the 4% to 5% range with cash flow margins approaching 22%. Based on these assumptions, our valuation model indicates Baxter’s current stock price offers a long-term average annualized rate of return of approximately 7%.

United Parcel Service  { UPS }


UPS is the world’s largest package delivery company in an industry where network size matters, both in terms of customers and spreading costs over a larger volume of packages. The company was founded in 1907 as a private messenger and delivery service in Seattle, WA. For calendar year 2021, UPS delivered 6.4 billion packages and documents generating $97.3 billion in revenue. 

The parcel industry enjoys favorable competitive dynamics. A start-up would find it difficult to replicate a competitive network quickly. The barriers to entry are high as carriers own and/or lease large fleets of airplanes and trucks, trailers, terminals, sorting equipment, drop boxes and IT systems. Despite its asset intensity and extensive unionization, UPS produces returns on invested capital about double its cost of capital and margins well above its competitors. This advantage is due to the firm’s investment in technology and operational efficiency.

UPS clients have the convenience of using the same driver to handle both express and ground packages, while UPS benefits from greater operating efficiency.    

Although there is intense rivalry between FedEx Corporation and UPS, pricing tends to be rational and price wars are rare. UPS normally produces higher profit margins than its peers, due to its use of integrated assets to transport U.S. express and ground shipments through the same pickup and delivery network. In contrast, FedEx uses parallel networks of drivers and trucks to separately handle ground and express shipping. UPS clients have the convenience of using the same driver to handle both express and ground packages, while UPS benefits from greater operating efficiency. The United States Postal Service is both a competitor and partner, sometimes delivering UPS packages the last leg of a shipment.


Over the past decade, UPS has significantly expanded the scope of its capabilities to include more than package delivery. Its logistics and distribution capabilities give companies the power to expand their businesses to new markets around the world. UPS provides shipping, logistics and return services for internet retailers whose sales are growing three to four times faster than those of brick-and-mortar stores.

The parcel industry is a major beneficiary of internet sales trends. Throughout the world, online buying has grown exponentially. We expect e-commerce growth to continue at a high rate over the long term. The gains from internet sales recently have been modestly tempered by product digitization and miniaturization, which reduces average package volume and weight. Despite these trends, a broader selection of products is being purchased online as younger generations are more comfortable with online transactions.

The shift toward e-commerce has led to a structural increase in the capital required to meet ever-evolving customer demand. UPS invests $1 billion a year in information technology. Such a level of commitment is a material part of its 2021 $4 billion plus capital expenditure. This investment has paid off in efficiency and reduced costs. For ground delivery, UPS indicates its ORION route optimization has reduced costs by $400 million. Throughout 2021, the company has rolled out improvements to its digital strategy. The redesigned website saw site visits grow one hundred-fold, with the company now generating over $9 billion in gross revenue annually from online transactions.

UPS has demonstrated high capital efficiency and strong cash flow generation throughout its history. The industry has benefited from three intertwined forces: the emergence of China, the trend toward just-in-time inventory and the rise of internet commerce. The company should continue to benefit from volume growth from businesses shipping to consumer, an oligopolistic industry structure and growing global trade and supply chains. Based on these assumptions, our stock valuation model indicates a long-term average annual rate of return of approximately 6%. 

Raytheon Technologies Corporation  { RTX }

Raytheon Technologies is the result of United Technologies Corporation spinning off Carrier Global Corporation and Otis Worldwide Corporation and merging with Raytheon after the end of the first quarter 2020. The restructured company is an even balance between commercial and defense aerospace. It is a unique structure, as most of its competitors in the industry are skewed one way or the other. Both the aerospace and defense products that Raytheon manufactures are characterized by substantial upfront development costs that require considerable technical and engineering expertise. Raytheon’s markets also are distinguished by deeply entrenched customer relationships and a razor (product) and blade (parts) business model. All of these factors create strong barriers to entry and a significant moat for each of these segments.   

Raytheon’s markets also are distinguished by deeply entrenched customer relationships and a razor (product) and blade (parts) business model. All of these factors create strong barriers to entry and a significant moat for each of these segments.

In its defense segment, RTX manufactures missiles, missile defense systems and space systems that include satellites and navigational systems. Deterrence is expected to drive material investment in each of these exposures, and we believe it will be difficult to decrease defense spending without sweeping political change. Raytheon is one of two leaders in short-range missile defense with its well-regarded and tested Patriot missile defense system. The trend is for continued investment in missile defense, as adversary states are actively developing hypersonic missiles that could penetrate current systems. Missile defense systems require high precision and integrated radar with substantial technical complexity leading to significant entry barriers and switching costs.


The commercial aerospace segment is comprised of Pratt & Whitney, a jet engine manufacturer. The segment develops, manufactures and services jet engines for civil and military purposes as well as auxiliary power units. Pratt is in the midst of a large ramp up in the production and deployment of a geared turbofan engine used in the Airbus A320 aircraft. Jet engines are often sold at narrow margins to develop as large of an installed base as possible, which in turn provides access to recurring, high margin servicing revenue. Commercial engines are expected to last 20 to 25 years, so a large installed base gives the company the ability to generate service and parts revenue for decades.

Collins Aerospace, another subsidiary of the company’s commercial division, manufactures highly integrated, mission critical products, such as landing gear, sensors, avionics and flight controls. The certification process and technical know-how of these products gives Collins a substantive competitive advantage. Switching suppliers for mission critical products would require a sizeable effort in redesigning the aircraft to accommodate the new product with attending production delays, updated maintenance procedures and federal recertification of the aircraft. 

Both Airbus SE and The Boeing Company are continually striving to reduce the margins of their suppliers. As a result, the supplier industry has consolidated, giving companies with size and scale like Raytheon more negotiating leverage on pricing than they would have as separate, independent entities. 

We do see elevated integration risk in the near term. Raytheon Technologies was formed by several corporate actions, including United Technologies divestiture of Carrier and Otis and the subsequent merger of equals with Raytheon. The company has targeted $1 billion in cost synergies overtime as the aerospace industry begins to return to a more normative environment after two years of COVID-19 disruptions.

The company is led by Greg Hayes who prior to the merger was the CEO of United Technologies. During his tenure he has been willing to restructure the portfolio, exiting poor performing segments while acquiring companies that were a strategic fit. He orchestrated the acquisition of Rockwell Collins and led a successful integration and realization of cost synergies.

Raytheon Technologies is well balanced between commercial aerospace and defense, which would partially cushion the combined firm from a downturn in either segment. We anticipate revenue growth over the forecast period of 4% along with operating margins reaching 12%. Based on our assumptions, our financial model indicates that at the current stock price Raytheon offers a potential long-term return of approximately 9%. 

Stanley Black & Decker Logo 

Stanley Black & Decker, Inc.  { SWK }

Founded in 1843, Stanley Black & Decker is a global leader in providing hand and power tools and related accessories to consumers and industrial customers. Despite its age, Stanley has experienced tremendous growth in recent decades. Remarkably, approximately 80% of the revenue growth has occurred since the year 2000.

Reliability and brand loyalty are important factors in the North American tool market. Customers have long memories and can be unforgiving if a manufacturer cuts corners. This brand consciousness helps Stanley in positioning with big box retailers. Retailers look for strong brands that command a premium margin and provide a broad umbrella of products to satisfy core customers. In 2021, the tools and storage segment of Stanley accounted for 80% of revenues and nearly 90% of the company’s operating profit. Brand loyalty of tools is extremely high across markets, and many users are willing to pay a premium price for quality products.

Historically, Stanley has been a serial acquirer and has a successful track record of integrating over 70 acquisitions since 2004. On average, Stanley has improved operating margins by six percentage points on acquired businesses. It absorbed the larger Black & Decker in 2010, significantly broadening its product portfolio and yielding revenue and cost synergies well beyond original expectations. The merger has created the largest provider of hand and power tools with enormous global reach and channel access, including high growth emerging markets. More recent acquisitions include the purchase of the 90-year-old Craftsman brand from Sears, Roebuck and Co. and the purchase of Lenox Corporation and Irwin Industrial Tools from Newell Brands. Stanley continues to consolidate the hand and power tools business and has built a broad portfolio of trusted and respected brands. 

With its increased innovation investments, the company’s product development plans
are robust as it aims to nearly double the number of professional products offered over the next three years.

Stanley is sharply focused on driving organic growth, which has matched the robust recovery in housing and home improvement. Research and development investment is over $275 million or nearly 2% of sales. The company earned more than 60 innovation awards in 2021, with 35% of 2021 tools revenue derived from new products launched within the prior three years. With its increased innovation investments, the company’s product development plans are robust as it aims to nearly double the number of professional products offered over the next three years. 


Longer term, acquisitions will continue to play a role in the company’s outlook. Stanley dedicates 50% of its capital allocation to acquisitions with a focus on tool industry consolidation and expanding its industrial platform. The branded tool and storage products are critically important aspects of the company that provide strong free cash flow. Stanley will continue to invest in new product development, such as smart tools and higher battery voltage power tools, and increase its brand support through marketing and promotional activities.

Stanley has a successful acquisition track record, but its acquisitive nature remains an ongoing risk. Acquisitions always introduce the risk of overpaying and later encountering asset impairments or inadequate returns on invested capital. Stanley also faces commodity price risk. The company does have the benefit of a domestic supply chain as approximately 50% of the company’s North American tools are manufactured domestically. However, its consolidated customer base and competitive markets may prevent Stanley from fully passing along rising costs in the form of price increases. 

We believe Stanley can grow organically in the low single digits. We also expect Stanley to continue its acquisition program and to fund it through free cash flow and debt financing. Based on this growth, we anticipate operating margins around 12% over the business cycle. Given these assumptions, our valuation model indicates that the company’s stock is priced to generate an average long-term annual rate of return of approximately 10%.


SGS is the world’s leading testing, inspection and certification company. The company creates value for a wide range of entities by monitoring and improving their productivity, quality, safety, efficiency, speed to market and risk management. The Swiss-based company has more than 96,000 employees and operates a network of over 2,400 offices and laboratories around the world. 

SGS has a very diverse portfolio of businesses both in terms of end markets and geographies.  The three main lines of business include testing, inspection and certification (TIC) services. These services are applied across a number of industry sectors, including agriculture, minerals, construction, oil/gas/chemicals, automotive and food, to name a few. The TIC industry is diverse, encompassing activities as disparate as certifying adherence to government standards, operating testing or inspection systems for corporations, testing products for safety and reliability and inspecting products to make sure they meet performance standards. The overall unifying concept of this business is the need for testing, inspection and certification of products, services and systems by engineering experts who have a reputation of reliability and trustworthiness.

SGS’s revenue patterns tend to be relatively stable since a large portion is generated from recurring contracts. Customer retention is high as it can be expensive and time consuming to switch from one TIC company to another.

SGS’s revenue patterns tend to be relatively stable since a large portion is generated from recurring contracts. Customer retention is high as it can be expensive and time consuming to switch from one TIC company to another. Furthermore, many TIC services are highly specialized and can be delivered only by a limited number of certification companies.  Another competitive barrier to entry is global scale. Size is a key advantage to capturing the largest and most complex contracts. Clients often seek TIC providers with appropriate financial strength and the ability to mobilize large teams to perform short duration projects. SGS’s global network and strong brand facilitates continued market share gains from smaller local competitors. SGS is well positioned to deliver profitable growth going forward.


With its approximate 15% global market share, SGS is the leading company in an attractive industry. The TIC industry is a beneficiary of a number of global trends including increasing government regulations, environmental and safety concerns and outsourcing. Standards have been applied with growing intensity as more products are being manufactured overseas creating a need to trace product origin and maintain quality. Increasing concerns around the environment, safety, quality and performance in all industrial and consumer products and foods should continue to drive increased product testing.

In early 2021, the company launched SGS Sustainability Solutions, which focuses on assessing carbon footprint, business continuity and industrial safety. This segment includes services that evaluate an entity’s ESG (environmental, social and governance) practices in a range of sectors for Africa, Asia, Europe, and North and South America. These solutions will provide data and quantify transitions to alternative energy, responsible supply chain sourcing and traceability as well as environmental impact.

SGS does face challenges today as COVID-19 slows global production of goods and services. The company is broadly diversified across nearly all industries and regions and will be impacted by cyclical ups and downs of the global economy. Its broad diversity and growth in remote inspection and testing, life sciences and medical testing should help limit its downside. Further risks include a potential slowdown in international trade, increased protectionism, reputation risk and country risk.   

We believe organic growth and market share gains should allow SGS to grow its revenues nearly 6% annually over the next decade. In addition, through cost efficiencies and adequate pricing, operating margins should average 16%. Our model indicates the company’s stock offers an average long-term annualized rate of return of approximately 6%.     

Dated: March 28, 2022

Specific securities were included for illustrative purposes based upon a summary of our review during the most recent quarter. Individual portfolios will vary in their holdings over time in relation to others. Information on other individual holdings is available upon request. The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Any projections are hypothetical in nature, do not reflect actual investment results and are not a guarantee of future results and are based upon certain assumptions subject to change as well as market conditions. Actual results may also vary to a material degree due to external factors beyond the scope and control of the projections and assumptions.

This document is for informational purposes only. The views stated in this document should not be construed, directly or indirectly, or as specific investment advice for an individual’s situation. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results.