We’ve been hearing a lot in the press about the valuation differences between small and mid cap companies versus large cap companies. What is your team currently seeing in your research?
I like to say price is what you pay, and value is what you get. So, when discussing valuation, I think you have to take into account the underlying business quality and the sustainability of growth. There are some areas in the market that we do think are fairly full in terms of valuation. But at the same time, there are also areas of the market that are experiencing some pressures and are presenting some opportunities to really take a look at what we feel are some nice, high-quality businesses.
Another item getting a lot of press attention lately is earnings growth. Predominantly, mega-cap tech has driven most of the earnings growth. However, if you look beyond mega-cap tech, earnings have been relatively flat and negative in many areas. What has the team been seeing in your portfolios as far as the potential for earnings acceleration in the back half of 2024?
We’ve been quite pleased with the underlying fundamental performance of our companies. Certainly, I would acknowledge that the first quarter GDP readout was fairly weak. Inflation remains a bit stubborn and elevated, and I think that that’s causing some pressures across durable goods in some areas. I think it’s important to step back and remind our investors of our core emphasis, which is identifying what we believe are all-weather vehicles. And that means that we insist that our companies can perform in a variety of macroeconomic environments.
How are you feeling about valuations these days? Mega cap tech looks like it’s trading on a price-to-earnings basis well above its 5-, 10-, and even 15-year averages. Where are you and your team finding the most opportunity today?
The whole team is really a student of market history. We know that there are always opportunities out there that we can uncover. Our focus always remains on being intellectually honest with our work, emphasizing our team’s collaborative nature, and leveraging each individual analyst’s insights. Right now, we definitely are finding some areas of the market that are presenting opportunities. There are some great businesses and brands that are under pressure within consumer, some related to some factors around GLP-1 (a diabetes drug that’s now also approved as a weight loss drug) impacts, but really kind of idiosyncratic opportunities across business services and technology.
Sometimes, for an active manager, it’s more important to generate excess returns from companies you pass on or areas you don’t own. What are some warning signs you and your team look for as far as companies or situations to avoid?
Our process has always been to look down before we look up. Meaning that we’re always trying to insist on a margin of safety within our recommendations and valuation assessments. So, what we’re really trying to assess with our qualitative assessments is the durability and strength of the company’s competitive moat. And so if we can’t satisfy ourselves that is being met in our research and our field research efforts, then we’ll simply move on to the next opportunity.