Sector Spotlight: Consumer Staples
April 15, 2021
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The efforts to slow the spread of the coronavirus brought the U.S. economy to a grinding halt, leading to sharp declines in employment and economic activity and a surging jobless claims. For the first few weeks following the rolling lockdowns, U.S. job claims spiked to over 30 million people. Spending habits have been completely altered and will likely remain so as long as we are collectively practicing some form of social distancing. The economy will eventually reopen and people will adjust to a new normal, but spending habits formed during the lockdown may remain out of necessity for those seeking gainful employment, and potentially out of a higher propensity to save versus spend for those employed and less certain about the future.
As we look for investment opportunities for our growth portfolios, we focus on profitable companies that we believe have durable competitive advantages with self-funding business models, positive free cash flow, attractive balance sheets, and favorable liquidity positions. Our experience investing through multiple cycles tells us that economic downturns do the most damage to companies with weak business models or undifferentiated products, poor free cash flow and generation, overleveraged balance sheets, and an inability to adapt and remain focused on the long term.
The ability to weather more challenging periods is critical to our pursuit of the best possible outcomes for our clients over the long term. And we believe our insistence on owning durable high quality growth businesses positions us well to endure these types of environments. As an example of where we're finding opportunity, we look at the technology sector and specifically the software and IT services industries, two areas that provided some level of defense during the first quarter. But we believe the opportunity goes beyond just defense, and it is important to be selective in what we own in the space. Looking for companies that can grow revenue, cash flow and earnings over the next three to five years above and beyond what Wall Street consensus thinks they can. We're looking for companies that exhibit the following characteristics: They provide one, a critical product or service that's necessary to conduct business, saves customers money and/or time, and automates manual workflows, products or services that have clear market leadership and advantages in user experience versus alternatives. Two, companies that have scale from a resource and balance sheet perspective, with management that has a long term focus, and the ability to invest and innovate through the downturn to take market share from competitors and become more relevant to their customers. And three, a culture that puts customers first and demonstrates empathy to customers, employees, suppliers and partners.
We see this with companies developing COVID-19 specific innovation of new products or flexibility knowing that customers and employees will remember how companies treated them in both the good and bad times. Now, 2019 saw a lack of dispersion and a lack of volatility across the board as most equity markets went up into the right. 2020 has already seen a significant increase in volatility and dispersion among equities. As we look forward to the remainder of 2020 and beyond, as different parts of the economy work to come back online, we believe it may provide opportunities for skilled active managers to identify profitable companies with attractive future growth prospects that have been mispriced by the market due to the macroeconomic uncertainty.
The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.