Earnings: We are two-thirds of the way through
As regular readers of the Pathfinder 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, which is colloquially called “earnings season”. This is an important part of our investment process because we are able to check on the progress of the companies that we own, as well as management’s expectations for the future of the firm. Readers will recognize the aggregate sales data for North American companies noted in Figure 1. We traditionally use sales growth as a barometer, as earnings can be somewhat manipulated. We also use the actual observed data as opposed to street expectations or “surprise” data. We focus on how the companies are actually operating as opposed to how they have done relative to what various stock brokerage analysts predict. Some money managers use expectations as a tool to trade against (or with) “the market”, buying or selling companies based on their perception of what the rest of the community thinks. Our focus is less about what other people think and more about what we think. This is particularly important right now during all of the recent market volatility. Price is different than value. Trading with or against “the market” has been extremely difficult since the beginning of the year. More recently, we are seeing opportunities to take advantage of “what other people think” by buying good quality cash flowing companies at what we believe to be low prices.
- As of this morning, 65% of companies have reported with aggregate sales growth of 27% from last year at this time. This is a huge number and represents significant recovery but also substantial growth from price increases in cyclical industries.
- Note the spectacular increase in the Materials and Energy While the other sectors had strong performance (high single or low double-digit results) the two commodities linked sectors are standouts. We looked a little deeper into the data and found that Diversified Metals and Mining companies have really driven the Materials sector. With the Energy sector, there is broad strength from Integrated Oil, E&P and Refining and Marketing companies. While the growth in energy was more broad, materials now generate more sales in aggregate. This is a new development and it will be interesting to watch how it evolves over time.
“This means that” as noted above, there is now opportunity to put cash to work and/or switch to companies that provide improved long-term valuation discounts. We remain laser-focused on executing our investment management process.
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.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High 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 Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.