Another Strong Quarter for the Corporates
As regular readers of the Investment Outlook know, our writing follows the calendar of quarterly earnings reports. The companies that we invest in report financial data and management commentary on a regular basis around the same time each quarter. This is colloquially called “earnings season”. A central component of our investment process is following company-reported financials and management commentary to assess operational progress and future expectations. Internally, we informally declare the “end-of-earnings season” when the results of the Canadian banks are published. All 6 big banks reported this past Wednesday and Thursday. In the Canadian banking sector, we saw results which were generally ahead of expectations. The results were strong in the banks’ capital markets divisions, continuing a trend of heightened trading and investment banking activity. Provisions for future credit losses on loans came in lower than anticipated; however, the macro environment is changing quickly. This means that while current credit performance we are seeing is positive, the heightened risk of losses remains should we see further deterioration in the outlook from trade or conflicts.
Regular readers will recognize the aggregate sales data for North American companies noted in Figure 1. We prefer to study aggregate sales data as it is harder to manipulate than earnings. We also focus on “all listed companies” in North America, rather than a widely used index, like the S&P 5oo, because we find the large global companies that dominate those types of indices can skew a significant portion of what would be considered “Main Street”.
So far, 2,935 firms or 94.4 % of North American companies have reported. We have not seen results this strong for a long time. Sales have accelerated each quarter and grown on average 10.6% year on year. Much like last quarter, we would not have expected this, given the current environment; however, corporate North America is doing very well. No sector has come close to negative growth. Even with Technology continuing to remain the outlier (30% sales growth off of a huge base!!), the results are broad and essentially no industry posting weakness.
“This means that” the data continues to surprise us. While we welcome the strong performance, we are not confident of the overall outlook given current geopolitical issues and the clear struggle for large sections of the global economy. Inflation, bond yields and commodities shortages cause us to remain somewhat cautious.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Conviction Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
For more information, please follow the links above to review the fund term sheets.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Pathfinder Conviction Fund are presented based on the master’s series of each fund. The Pathfinder North American Equity Portfolio and The Pathfinder North American Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder North American Equity Portfolio (January 2011), Pathfinder North American High-Income Portfolio (October 2012) Pathfinder Partners’ Fund (April 2011), Pathfinder Conviction Fund (April 2013), and Pathfinder International Fund (November 2014).
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