Strong Company Results
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 the progress of the companies that we own, as well as management’s expectations for the future of their firms.
Regular readers will recognize the aggregate sales data for North American companies noted in Figure 1. We traditionally use sales growth as a barometer for general growth as earnings can be somewhat manipulated. We also use the actual observed data as opposed to street expectations or “surprise” data. The focus for us is how the companies are operating as opposed to how they have done relative to what the 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, but our focus is less about what other people think of a particular company and more about what we think the actual value of the company is. This quarter, we have noticed a strange reaction to a number of company earnings releases. While it seems that most companies (other than materials) are beating sales and earnings expectations, the market reaction to those individual companies has not been as positive as one would expect for such strong results. In some cases, the stocks were punished for results that beat expectations but did not “beat them high enough”. One could conclude that speculators have become exhausted and can’t drive prices higher or alternatively maybe that multiples have dropped and companies with strong fundamentals are potentially growing into their valuations. It is hard to say at this point, given how high prices of individual companies and indices generally are.
- There was another weak quarterly comparable (fall 2020) so the top-line sales numbers look quite strong, but many industries have reached pre-pandemic activity levels.
- While we focus our analysis on actual sales growth, it is worth noting that this quarter, much like last quarter, earnings results have been very strong. However, this quarter is somewhat different as it seems that expectations for exceptional growth are very high.
“This means that” the North American economy continues to recover and is now in expansionary territory. While valuations in some segments remain “sky high” (our view), on this morning’s “desk call”, we spoke about it being a “stock picker’s market” (i.e. there are companies and sectors to find good buys and avoid traps). As always, we will continue to watch closely and adjust the portfolios to where we believe we can own the most value and opportunity.
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.