Another volatile month for stock prices as markets focus more on the macroeconomic landscape. This sees most stocks being treated the same, no matter their specific financial circumstances. Insync’s portfolio of quality companies delivered an average EPS growth of 10%+ in their most recent quarterly update. A great result. Yet, as markets are presently concerned with short term interest rate hikes, even quality companies posting great results (despite inflation and interest rate settings) are tarred with the same brush as those that are impacted.
This is nothing out of the ordinary for this stage of the cycle. Whilst inflation has peaked and gradually heads down, markets are now trying to anticipate what impact higher interest rates will have on the global economy and corporate earnings. The benefit of investing in highly profitable companies with long runways of growth backed up by megatrends, comes the higher confidence around their longer-term earnings growth rates, irrespective of macro-economic conditions! Whilst an economic slowdown may temporarily reduce the growth trajectories of high-quality compounders, their long-term growth rates tend to be more assured.
The temptation to time being in or out right now is high as is the cost. Bank of America found that investor returns in the S&P 500 would stand at just 28% today had they missed just the 10 best days of each 3,650 day decade since the 1930’s - a dismal result. It’s a whopping 17,715% had they held steady. Market gyrations are not insync with news cycles or with logic. This is why timing is risky. Buffet’s metaphor stands… “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Our funds are for long term investors, and this is why its important to reflect on this.
Companies can do well - even now
Market sell downs in periods of volatility often provide the best opportunities to invest for the long term. Back during the GFC (March 09’) Home Depot was trading at $13 per share and Microsoft was trading at $12.
Today Home Depot is at $276 & Microsoft is at $245.
There was plenty of bad macroeconomic news over this period to dissuade being invested too. A US debt ceiling crisis in 2011, European debt crisis in 2012, Greek default crisis in 2015, collapse in China’ stock market in 2016, Covid-19 crisis in 2020…you get the picture.
Home Depot also paid 10% p.a. compounding dividend (they expect to pay a $7.60 dividend in 2022). This means you are receiving well over HALF your original purchase price back in 2009 in dividends from just this year! Patience rewards.
We remain confident in the strength and durability of earnings growth in the Insync portfolio companies and see temporary price falls as ideal buying opportunities.
Two further examples of highly profitable companies in the portfolio are Lululemon and Ulta Beauty, both benefitting from the Lipstick Effect.
Their recent quarterly earnings updates Lululemon reported a 29% revenue increase and a 30% increase in EPS. Ulta Beauty reported a 17% increase in revenues and a 25% increase in EPS (earnings per share).
When investors keep focused on the growing earnings power of quality companies, they find their stock prices grow eventually as well. This is especially true for the investor time periods the fund is designed for.