Quality Growth Boutique

2Q 2020 US Equity Outlook: Looking to upgrade portfolios amid turmoil


Looking to Upgrade Portfolios Amid Turmoil

Ed Walczak maintains that demand for consumer staples is intact over the long term, finds opportunity in companies that can benefit from lower oil prices, and believes that investors should assess whether portfolio holdings can withstand a protracted downturn.


The coronavirus induced sell-off of global equity markets and shutting down of the economy is unprecedented. While it is necessary to be mindful of macro factors, now is the time to review each portfolio holding to ensure it has the attributes, such as a strong balance sheet, high return on capital, and shareholder-friendly management, to survive a protracted downturn.

Consumer staples companies have historically offered investors some predictable earnings growth, which have helped buoy returns during periods of uncertainty or economic downturns. But, given today’s unique circumstances with consumers confined to their homes, spending patterns are changing. While near-term demand for Budweiser beer or luxury goods in China might be adversely impacted, good quality staples businesses should be more resilient over the long haul. We do not think long-term consumption patterns will significantly change once health risks recede.

While we did not foresee the oil price collapse that stemmed from the Saudi-Russia dispute and a slump in global growth, investors should look for companies that might benefit from lower oil prices. For example, for a company like Sherwin Williams, oil is a major component of its raw material supply, and for Ecolab, a company that makes cleaning supplies, oil is a substantial part of its cost of goods sold.

This crisis presents an opportunity for investors to upgrade and further concentrate their portfolios in the strongest business models. While selling has been indiscriminate across sectors, diligent investors who have done their homework can identify those companies that will recover in a stronger position.

With bond yields having come down and interest rates are likely to remain low for the foreseeable future, the present value of the future cash flows of good quality growth stocks should increase. In fact, the value of quality growth equities could be higher today than a year ago when interest rates and inflation were higher.




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