The summer of 2009 is drawing to a close and as a number of us return from holidays and vacations our attention can once again be directed towards the stock market, our investment portfolios and the prospects of investing over the remainder of the year.
The problem so far in 2009 is that despite a huge amount of volatility earlier in the year the rest has been…well…pretty dry. Stocks, corporate bonds and mutual funds have all appreciated off their lows and a lot of investors are scratching their heads wondering where the value is in this current environment.
When you look at most measures of quantitative value such as price to earnings (P/E), price to book (P/B) or dividend yield there are a lot of stocks that don’t appear cheap and the ones that are cheap are inexpensive for a very good reason; a poor investment.
It’s at times like this that I look towards my discipline of investing in Enduring Value for guidance of where to allocate my investment capital. As a value investor I am always conscious of the price I pay for any investment (the quantitative value) but Enduring Value focuses as much, and at times more, on the qualitative factors of a company. As I update my situational analyses on various companies as earnings are released I’m finding a number of companies I own are doing very well in key areas of value that I like to concentrate on.
There’s a lot of focus right now on earnings and what companies are beating or missing their respective targets. Earnings are certainly important, but the EPS we’re seeing posted by many companies is of poor quality considering the economic landscape we’re in. Right now I’m not as concerned with earnings as I am with companies that are fiercely protecting their margins in the face of lower consumer demand and rising costs. Two companies, Costco (COST) and Coca-Cola (KO), have shown a longstanding commitment to not competing on price and they don’t sacrifice their margins in order to spur demand. Competing on price will rarely, if ever, move a company into a better position over the long-term and when the economy (domestically or globally) turns around a company wants strong margins to take advantage of. Cutting margins now is not the right move at this time and companies that have maintained or grown their gross margins and profit margins are maintaining their profitability in a very tough environment.
A Bigger Piece of the Pie
If margins are to be fiercely protected at this time then market share is the other side of the coin that companies must fight to protect and grow coming out of this recession. Enduring Value is a belief that in a recession the strong get stronger. With so much attention focused on the troubles in the US financial system our Canadian banks are taking their global competition to the cleaners; literally. Loan growth (consumer, business & government) has exploded over the past 8-12 months as businesses, investors and governments move their deposits, investments and activities to stronger financial institutions. Banks such as Bank of Nova Scotia (BNS), Royal Bank (RY) and TD Bank (TD) despite lower earnings have pulled massive amounts of business from their global competitors in anticipation of eventual increases in net interest margins. Taking additional loan loss provisions now is a small price to pay for the eventual reward of higher earnings as interest rates rise and traditional business growth booms.
How Can We Help You Today?
The core products and services that companies can offer their customers in this current environment help to determine the winners from the losers as the economy improves. When incomes are squeezed (corporate or consumer) customers will become increasingly targeted in their spending on products and services they want or require. This is not an environment where a company can be over diversified in the product portfolio or be offering services that aren’t in demand. Companies that can differentiate and focus their product/service portfolios to attract an increased amount of business from existing and new customers will benefit greatly. Companies such as Saputo (SAP), Becton Dickinson (BDX) and Thomson-Reuters (TRI) that focus on the essentials and necessities of their customers stand to grow their market share while maintaining attractive margins.