We don’t know when the bear market will end or how much further stocks might fall. Nor do we know when an official recession will be declared or how long it might last. However, we do expect volatility to be persistent. This is, after all, the first downturn in more than three decades unfolding while the Federal Reserve is having to fight inflation, which creates its own uncertainties. We also believe the pain felt in the equity markets thus far has largely been driven by multiple compression, as the speculative air has been squeezed out of the market. Stock prices could continue to be pressured in the coming months as analyst estimates, which still seem far too optimistic, are ratcheted lower and as more companies reset their earnings and revenue guidance amid recession fears.
With the market quickly pricing in a potential recession in many stocks, we are eagerly assembling our wish list of well-managed companies that stand to benefit not only in the early stages of the next cycle but for years to come. We are looking for well-managed businesses with quality balance sheets, little leverage, and strong free cash generation. For an added level of safety, we prefer companies that are self-financed and don’t require perpetual loans and debt to grow.
As we sort through such companies that are hitting our radar, we will stay true to our philosophy and process. We don’t know when the markets will rebound, but we are confident that eventually well-run and well-financed businesses that are priced attractively will bounce back to the benefit of patient long-term investors. We believe this disciplined application of the Ten Principles of Value Investing™ will be key to navigating the quarters ahead.
Thank you for your continued trust and confidence.
Sincerely,
Your Heartland Team