The first three quarters of this year will not be easily forgotten. The S&P 500 experienced the fastest selloff in history, declining 30% in only 22 trading days[1], spanning February to March, 2020. Subsequently, we have also witnessed one of the fastest recoveries in history as well. Whether it is considered a V shape, U shape, or ‘Nike Swoosh’ recovery, there is no denying that many stocks have climbed back to their pre-pandemic levels – with some far surpassing their previous highs. Given this meteoric rise, concerns about valuations have returned for many investors.
When you look at the stocks that make-up the S&P 500 today you will find many of them within 10% of their 52-week highs. While this may sound alarm bells for some, we believe it points to the fact that strong, high quality businesses are continuing to thrive and became mispriced in those 22 trading days. If, on the other hand, a stock portfolio today is trading near its 52-week lows, there is a definite reason for concern.
At Bristol Gate, we create portfolios concentrated in companies with the highest fundamental qualities that can share their success through high dividend growth. We believe that the total return potential of our holdings is not only to get back to their 52-week highs, but we believe in the long run total return potential for our holdings. By identifying those companies that have sustainable runways to maintain that growth and by buying them at reasonable prices we expect to be rewarded in both income and capital growth. In short, we do not search through the bargain bin for stocks that have problems hoping for a recovery, we look for the winners of tomorrow.
As our Investment Team likes to say, “we want our companies to operate the same way they did last year”. Predictable companies with attractive free cash flow generation abilities and sustainable reinvestment opportunities rarely look like screaming bargains at any one moment in time. However, due to their tremendous ability to compound their business returns over the longer term they prove to be more of a bargain than might have met the eye.
[1] https://www.cnbc.com/2020/03/23/this-was-the-fastest-30percent-stock-market-decline-ever.html
Important Disclosures
There is a risk of loss inherent in any investment; past performance is not indicative of future results. Prospective and existing investors in Bristol Gate’s pooled funds or ETF funds should refer to the fund’s offering documents which outline the risk factors associated with a decision to invest. Separately managed account clients should refer to disclosure documents provided which outline risks of investing. Pursuant to SEC regulations, a description of risks associated with Bristol Gate’s strategies is also contained in Bristol Gate’s Form ADV Part 2A located at www.bristolgate.com/regulatory-documents.
This piece is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. A full list of security holdings is available upon request. For more information contact Bristol Gate Capital Partners Inc. directly. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice. Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at bristolgate.com.
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