Seeing the Forest from the Trees

Share markets around the world have been hit with a 10% correction over the course of January, as markets adjust their valuation multiples for stocks due to higher interest rate expectations. During such revaluation events we think it is important to see the “forest from the trees” by focusing on the operating results of portfolio companies, rather than focusing on broad based stock market movements.

One way of seeing the forest from the trees is to consider the latest set of financial results from the largest companies on the planet, which continue to demonstrate a divide between those companies that are negatively affected by global supply chain issues and rising inflation, and those companies that can control prices that are benefitting from structural trends and are trading at sensible valuations. In the latter category are the large technology companies such as Microsoft, Apple, Alphabet (Google) and Amazon, which have unveiled their latest set of financial results, generally delighting investors with double digit growth rates and end markets that have plenty of growth runway ahead.

Amazon is an interesting case study as it both benefits from favourable structural trends in e-commerce and cloud computing trends but also faces rising costs from supply chain disruptions and rising labour and freight costs. Amazon is a unique beast in that it commands a dominant market position across its business segments and is demonstrating this strength by increasing customer prices via its Prime membership product by nearly 20%.

One of the best results from the latest US reporting season was Microsoft (MSFT), which reported 20% revenue growth and 21% earnings growth, buoyed by extremely strong growth rates in cloud computing (+46%) which is benefitting from companies increasingly shifting their workloads to outsourced IT providers. Outside of cloud, Microsoft continues to benefit from increased adoption of productivity tools (Office and LinkedIn) +19% and personal devices (Windows and Gaming) +15%.

The technology adoption trends benefitting Microsoft appear to have a sustainable runway of growth ahead given the benefits it provides consumers and enterprise users alike. Microsoft CEO Satya Nadella put it this way, “Digital technology is the most malleable resource at the world’s disposal to overcome constraints and reimagine everyday work and life”. We continue to hold a constructive view on the stock as it appears reasonably priced as one of the highest quality businesses in the world with earnings growth of 15% to 20% per annum over the next few years.

The largest company on the planet, Apple, also posted market beating financial results with revenue +11% and earnings +25% year over year, with demand for its products (iPhone, iPad, Watch) and services (App Store, Music and Movies) maintaining a strong growth trajectory. Apple has not provided formal guidance since the beginning of the Covid-19 pandemic, but the market was also excited by comments from CEO Tim Cook that supply chain issues are starting to ease.

Another sector that we have long term conviction in is Healthcare, as favourable demographic trends are likely to buoy earnings growth over the next decade. One of our preferred names in the sector is the world largest Healthcare stock, Johnson & Johnson (JNJ), which reported sales growth of 13% and earnings growth of 22%. JNJ saw strong growth in its pharmaceutical (+14%) and medical devices (+16%) segments, which benefit from increased surgery volumes. The stock trades on an undemanding valuation multiple, is the broadest healthcare exposure on the planet, and is expected to grow its earnings at high single digit rates over the coming years.

Our View

While market corrections due to macro issues are unpleasant, they are a normal part of the investing journey, and investors that focus on investing in companies benefitting from structural trends with sustainable competitive advantages and strong cashflow generation will be well placed to grow capital over the longer term.

If you wish to discuss any concerns about the current market or about any strategies to do with your financial plans, do not hesitate to call your Financial Adviser.

Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. February 2022

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