In the second quarter, we made several adjustments across various sectors in our portfolios. In our healthcare sector, we purchased a position in Medtronic (tkr: MDT), a leading medical device company focused on treating diseases affecting the heart and the nervous system, as well as diabetes. The stock had underperformed following the acquisition of Covidien, which was completed in 2015. Covidien’s lower margin products weighed down the combined company’s operating margins, although they have begun to trend back up. Meanwhile, Medtronic’s valuation remains low and management sees growth opportunities in emerging markets and in value based contracting, where Medtronic takes on the risk for non-performance of new products that it believes will improve patient outcomes while lowering costs. We think this is an attractive offering that should fare well if we eventually see elevated scrutiny of healthcare costs. We sold our position in Stryker (tkr: SYK), which had performed well but had risen in both price and valuation. Stryker and Medtronic are both medical device companies, so our relative exposure remains the same, but we believe there is more upside opportunity in Medtronic.

In our industrial sector, we bought Stericycle (tkr: SRCL). Stericycle had declined precipitously following the challenges related to the integrations of two large acquisitions as well as a pricing-reset period for its smaller customers. These issues caused margins to decline, sending the stock price down along with the valuation. We believe Stericycle’s core business is intact and that its multiyear turnaround program should begin to bear fruit. We took the low valuation as an opportunity to initiate a position.

We sold our position in the Utilities Select Sector SPDR® ETF (tkr: XLU). Given that we are seeing a trend of declining per capita electricity use due to adoption of energy-efficient lighting and appliances, we looked at how this might affect utilities stocks. As usage goes down, utilities make less money, although we acknowledged that widespread electric vehicle adoption could offset declines. However, we believe that this adoption is far down the road. Furthermore, the adoption of customer-owned solar electricity may rise, which would put further pressure on utilities. Rising rates will also pressure utility company earnings, since these companies must borrow to build and maintain their infrastructure. All of these factors together led us to sell our exposure to utilities stocks.

We decided to sell our position in Paychex (tkr: PAYX) for a number of reasons. Although we had maintained the position partly because we believed that rising interest rates would boost Paychex’s bottom line as they collected interest on funds held for clients, recent clarity from management indicated that this amount would be negligible. Furthermore, Paychex indicated that it was planning to reinvest savings from the tax cut into technology and sales initiatives, guiding margins lower than we had anticipated. Management also highlighted increasing competition in the “mid-market” (20-500 employees) space, probably due to upstart competitors taking market share. Finally, with the U.S. labor market near full employment, we see little opportunity for growth in Paychex’s core segment. In recent years, ancillary services have allayed these concerns and augmented growth, but this segment’s growth has begun to decelerate in recent quarters.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.