The Value of a Patient Approach

“Traditionally the investor has been the man with patience and the courage of his convictions”
— Benjamin Graham
 
 
Equities spent much of the period building on the strength of the previous period as investors concluded that the worst of the COVID-19 recession was over. The momentum stalled in the final few weeks as investors grew wary of extended valuations for many areas of the market. The optimism that was in place for much of the period seemed grounded in the belief that the combination of an accommodating Federal Reserve and government stimulus would propel earnings to pre-pandemic levels in the coming quarters.
 
Large growth companies were among the top beneficiaries, as investors seemed to continue to chase yesterday’s winners. The dynamic led to the gap between top and bottom performers reaching levels not seen since the “Dotcom” era, as shown below.
 

Small-Cap to Large-Cap Historical P/E Ratio

Source: Furey Research Partners, FactSet and Standard & Poor’s. 1/1/1990 to 9/30/2020. This chart shows the difference in returns, as a percentage, for the best and worst performing sectors in the S&P 500.
Past performance does not guarantee future results.

Traditional safety nets such as strong balance sheets or attractive valuations were an afterthought and reasonably priced businesses lagged.

While Wall Street showed a willingness to look past debt levels, government deficits and private sector leverage shot into unprecedented territory raising questions about the sustainability and true underlying strength of the U.S. economy. If the economy is less robust than conventional wisdom suggests, many of the richly valued businesses with rosy growth forecasts could stumble in the quarters ahead.
 
Despite investors clamoring to bid up large growth companies, we’ve stuck to our time-tested formula that emphasizes finding growing companies, with solid balance sheets that are trading at discounts to what we view as their intrinsic worth.

In the past several quarters, our process and attention to detail has led us to winners in a wide range of industries. While the catalysts among top performers has varied, these businesses shared the common trait of valuations that we found far more compelling than the multiples paid by momentum investors for a handful of tech stocks in the S&P 500.

We believe this fundamental approach can at times require patience but also is the best way to help our clients achieve their goal of capital appreciation. The valuations of our portfolios are compelling, in our view, with solid sales and earnings growth potential which could exceed that of many ridiculously priced market darlings.    

Sincerely,
Your Heartland Team

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Past performance does not guarantee future results.

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