Rabbit Season? Duck Season? No, Earnings Season! – July 19, 2019

Rabbit Season? Duck Season? No, Earnings Season! – July 19, 2019
Morgan Lewis Posted on July 19, 2019

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Rabbit Season? Duck Season? No, Earnings Season!

Earnings season is upon us, and updates from companies in which we have interest are beginning to trickle out. Often, it can be a double-edged sword. There are many in the investment community who engage in short-termism, and will punish a company with solid long-term fundamentals for a “miss” due to some transient factors beyond the company’s control, such as the weather, a revenue booking that was pushed into the following quarter, or a host of other temporary concerns that have no bearing on the long-term investment thesis. In fact, for many investment managers, it is much easier to simply sell a stock than to explain a “mistake” to those to whom they report.

This is a dynamic that can bear enormous rewards for patient long-term investors. In fact, the average holding period for institutional investors in any given stock is less than one year. While we acknowledge that disrupted industries are changing the investment landscape more quickly than before, compensation incentives for much of the investment community are largely along the lines of shorter-term performance. Additionally, the incentives for management teams to keep their stock prices elevated are misaligned; they make short-term business decisions to “make the quarter” that can be detrimental to the long-term health of the company.

There are many investors who want to do away with quarterly reporting altogether, most notably Warren Buffett. While we believe he is well-intentioned, and we share his concerns about short-termism, we believe this to be a mistake. We appreciate hearing the operational updates and business outlook from corporate leaders, particularly given how quickly the business landscape is evolving.

Therefore, we also look at quarterly earnings season as an exceptional opportunity for us at MWM, particularly at this juncture as we are broadening out the MAPS portfolios. As we have mentioned in prior commentaries, many of the names that we like, due to the collapse in global yields, have had extraordinary moves to the upside. We have not engaged in FOMO (fear of missing out), and have waited patiently for the opportunities that the market might present. Given the moves that we have seen and the fact that the stocks had been largely priced for perfection, we have believed that there was risk in front of earnings that anything short of a “beat and raise” would create a sell-off. In short, earnings season is an exciting time for us at MWM.

The key to investing well despite quarterly hiccups is to accurately discern whether the company has hit a pothole or quicksand. We ask: Has there been a change to the long-term trajectory for this company? Does the company have to spend significantly more capital in order to achieve its strategic vision? If so, does this begin to strain the balance sheet? We listen to quarterly conference calls intently to determine what sort of obstacle the company may have encountered, and what it means for the long term. Is the company still poised to create long-term shareholder value? Can we buy it for a reasonable price? As we pour over company updates, listen to the calls, ask good questions, and focus on risk management, we are excited that the market will create longer-term investment opportunities for us.

As always, we thank you for your continued interest and support.

Best Regards,

David McAlvany
Chief Executive Officer

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