January was a positive month for the funds as investors gradually shift from worrying about interest rates to re-focusing on fundamental earnings. Whilst anxiety continues around exactly when interest rates will peak, this has a muted impact on companies harnessing megatrends that can also grow their revenues and earnings through periods of economic volatility.
The financial performances of the companies we hold remain strong. Consider two stock examples that have been in the portfolio pre and post-Covid in our Premiumisation and Pet Humanisation megatrends. LVMH’s sales today are 50% higher than in 2019. Despite rapidly rising interest rates and concerns over the state of the economy, demand for the most premium luxury goods continues to surge. Likewise with Zoetis. As a leader in providing medications and vaccinations to pets and animals, its sales increased by 35% since 2019. Both businesses' profitability is significantly higher than market averages. Both are benefitting from powerful megatrends which will continue to endure in the years ahead.
As Warren Buffet said, “In the short run the market is a voting machine (chasing whatever is popular today) but in the long run it is a weighing machine” (sustainable growth in earnings always wins).
Insync’s focus is very much on the long run. With earnings across our portfolio of companies continuing to compound and reach new highs, we are confident that investors will be richly rewarded. It is a rare opportunity for investors to buy such quality businesses, triggered by 2022’s sharp fall in stock prices, at costs that are as low as the cash flow multiples of the broad market.
Experiences Rule!
The Experience Megatrend, of which travel is a component, is one of 16 in our portfolio. Borders have reopened and travel is at full throttle. Growth rates in this industry are through the roof as the industry powers ahead from the COVID-19 pandemic.
An individual’s desire to travel is hardwired into human DNA. The rapid speed with which the recovery is occurring can be seen from the chart on the right; this is before China’s reopening has its likely large impact.
Whilst airlines and cruise ships may be the more obvious ways to invest in this megatrend, they come with high levels of financial and operational risk. Companies like Qantas have had to raise capital every time there is a crisis. Their long-term performance has never reached our minimum quality hurdles.
Our work has identified online travel agents are best positioned to deliver some of the highest and most consistent levels of profitability in this megatrend.
No capital raisings were required, despite the shutdown in travel because of their exceptionally strong balance sheets. As we move into an environment where the use of digital apps to efficiently build travel itineraries accelerates (including researching, booking, and paying), investing in online travel agents should provide one of the highest quality ways to participate in the resurgence and secular growth in travel.