PM Perspectives: Don’t Lose Sight of Company Fundamentals

Macro data, particularly official macro data, are backward looking. And so what we are looking, is to anticipate those macro inflection points: If interest rates skyrocket, if we see commodity prices going through the roof, if oil goes to $100, and we apply that worst-case scenario to the company. And if it’s still resilient, if the business model is still resilient even under those tough conditions, then we actually have a company that has a business model we like. It’s sustainable. And then we take the different scenarios and we do probability weighting. We say, “If the worst-case scenario’s only a 10% chance, if the base case is 50,” and we go through the different scenarios Over the last 25 years I’ve been investing, I think economists have gotten it right not even 50% of the time on their forecasts. It’s hard to be a currency expert. It’s hard to get those things right on a weekly basis. So what we focus on is really the bottom-up analysis of companies rather than making a big macro view.

At any point in time, you are going to have those fluctuations which cause some short-term moves in the earnings of a company. Where do we see actual companies benefiting from that situation? We aren’t seeing a lot of changes. These big global players have been hedging actively over time, they tend to put hedges on when it’s cheap, not necessarily when they have to do it. They tend to hedge both interest rates as well as currencies over time. And where we look at companies that have brands, strong brand names, maybe an Apple or one of the luxury good companies, they tend to push up pricing to offset weakness in the currency. So that they may be getting less units sold, but they continue to actually have pretty robust earnings. We also see some companies who can be a little bit more flexible on where they source their products. So in the case of one of the companies, Primark, which sources various fabrics and garments globally, they may be shifting from one country to another in order to maximize their margins as well. But you know, in the case of someone like Apple, their supply chain is fairly fixed because it has to be a source in a place where they have the talent to actually manufacture. So, they’re going to be pushing through the pricing on the revenue side and they’re going to adjust for changes in the dollar.