Quality and pricing power can offset volatility and inflation
Portfolio Managers Ed Walczak and Chul Chang highlight the future of tech companies, corporate profit margins, and supply chain reorganization.
The first quarter of 2022 illustrates the impact of unforeseen events and the importance of remaining focused on the long-term fundamentals of a business. A diversified portfolio of high-quality businesses can help investors prepare for volatility and uncertainty.
Pricing power will be important amid rising commodity prices, wage inflation and supply chain issues. While consumer staples companies tend to be resilient, we are cognizant of price elasticity and to what extent companies can pass on commodity price increases without reducing demand.
Industrial and technology companies that fill a mission critical need, are leaders in their markets, and have strong brands can also have pricing power.
The Fed will need to tighten monetary policy aggressively this year. We steer clear of high-multiple technology stocks, many of which are as yet unprofitable. However, we are excited about some tech companies given digitization and data proliferation in fast changing and highly competitive industries. Investors could see negative cash flows before real winners emerge but should seek out higher quality names with sticky, stable growth that are trading within reasonable expectations.
During the recent rise in interest rates, a number of strong companies were adversely affected and corrected. We are looking beyond tech for strong business franchises. If they are attractively priced today and offer enough of a margin of safety, we should revisit those names.
Corporate profit margins in America may have peaked and begin to decline somewhat. The chip shortage illustrates how interdependent markets are and how deglobalization can have profound impacts that are difficult to fully foresee. Investors should be wary that record profit margins enjoyed by corporate America could revert to the mean.
During this period of supply chain reorganization, large, well-run businesses will likely take share from smaller ones that will struggle to compete. The bigger players are likely to fare better whether companies onshore some facilities or work with exporters to secure goods.
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