July 2010 Market Commentary
Following Actions, Not Rhetoric
It is once again that time of year when we spend a tremendous amount of time reading comments from the CEO’s and CFO’s of companies we follow closely in order to discern the true state of their business activity and the economy as a whole. Over the last month we have heard from many of the companies which we have chosen to invest in on behalf of our clients. On balance the vast majority of these companies have reported better than expected results and are quite optimistic regarding the balance of the year and into 2011. That should not really come as much of a surprise for those who understand how we select investments.
What was most surprising however, is how many of these companies are actually expanding through capital investments, entries into new markets, and acquisitions. We sometimes get feedback from those who read our market commentaries that we are too optimistic and are ignoring many of the structural risks to the economy. Our reply to this feedback is usually that we are not ignoring risks, but instead acknowledging that they do indeed exist in the broadest sense. By acknowledging and endeavoring to understand the cause and effect of risks we are able to manage around such risks and find investments which are insulated from such risks or actually at times benefit from the responses to these risks.
We thought that it might be interesting to share some of the insight which we have gotten from the management of several of the companies which we are currently invested in. Below are several examples of companies which are actually growing, investing, and expanding at a time when most of what we are hearing as investors is stories of company after company who are not hiring, not investing and not finding new business opportunities because of uncertainty.
Alexander & Baldwin, Inc. is a U.S. company involved in logistics, real estate development, and agribusiness. Below are several comments management made during the recent second quarter conference call:
“Ocean transportation’s operating profit improved dramatically in the quarter, primarily from the strong performance in our China service. Our ships are operating at effectively full capacity and rate have increased 50% in the second quarter compared to rates for the same quarter a year ago and by 30% sequentially from the first quarter. We expect that the strength in China’s rates and volumes experienced in the second quarter will continue through the balance of 2010 and into 2011, subject to normal seasonality.”
“We are expanding our presence with a second weekly service between Hong Kong, Xi’an, Shanghai in China and Long Beach, CA. Our operations will begin mid-August and be in full deployment by early October. We will spend roughly $50 million to $60 million dollars to purchase containers and other equipment for this new service.”
Corning, Inc. is a U.S. company which manufactures glass and fiber optic products used in consumer electronics such as LCD Televisions, smart phones, computer display and telecommunications systems. Below are several comments from management made during the recent second quarter conference call:
“We are very pleased with our second quarter results as they exceeded our optimistic expectations. Second quarter was a tremendous quarter as we posted record net-income and earnings per share. “
“LCD television unit sales at retail were up 42% in April, 34% in May. In Europe, television growth was very strong, 20% in April and 34% in May. In Japan, April was up 44%, May, 29% and June, 35%. In China, LCD television unit sales were up 72% in April, 23% in May and 38% in June. In the U.S., sales were up 10% in April but down 7% in May and down 10% in June.”
“We now expect LCD TV unit sales in 2010 to be 185 million, which will be an increase of about 28% over last year. “
“In summary, we’re adding capacity in many of our businesses to be prepared to capture a significant amount of future growth. In China we are expanding our auto substrate plant. We’re also building a new manufacturing distribution center for life sciences. And we are adding a new melting and finishing factory for our LCD business. As a result, our capital spending will likely be closer to $1.2 billion this year versus our previous estimate of $1 billion, and looking ahead to 2011, our capital spending will likely be at least $2 billion.”
Stericycle, Inc. is a U.S. company which manages the collection and disposal of medical waste for doctors’ offices, hospitals and pharmaceutical manufacturing facilities. Below are several comments from management made during the recent second quarter conference call:
“We continue to see strong growth across all geographies fueled by new customers and a continued adoption of our value added services.”
“We are particularly excited about the recently launched RX Waste program for our domestic large and small customers. This program was rolled out across the entire U.S. and is also available in a number of our international geographies. Certainly it’s regulatory driven. We’ll see a lot more customers coming to us, but I would say that we’re seeng interest in all geographies and that’s why we rolled it out across the country as quickly as we could.”
These three companies are representative of what we are hearing from the majority of the companies which we follow and invest in. The companies which we are attracted to have management teams which don’t make excuses, they simply consistently deliver quality products and services and find opportunities to grow volume, market share and profitability. I have not yet heard any of the management of the companies we follow blame regulatory uncertainty or changing tax policy for not investing in their company or expanding into new markets.
Some investors choose to listen to pundits and politicians in order to ascertain what is happening in the economy. We choose to listen to business leaders when they are actually talking about their business and not during those times when they are using public appearances in order to try to influence public policy with their remarks. We find that many times business leaders in public forums will decry certain policies which they deem might present an added cost or hindrance to the way they would like to run their business, but at the same time they are taking steps to improve profitability and grow revenues. We discount much of what is said in the political realm and focus instead on what the businesses are actually doing. Just like in many areas of life, we find it much more effective to follow actions and not rhetoric.
We would like to take the opportunity to provide some insight into what we are doing at EHD Advisory Services so far in 2010. As we indicated in an earlier commentary we have hired two professionals earlier in the year and they have both significantly helped round out the services which we provide to our clients. We are well on our way to another record year in terms of growth of new client relationships and assets under management. The growth that we have experienced over the last two years enabled us to be honored by Financial Advisor Magazine as one of the Nation’s Top Independent Registered Investment Advisors for 2010. Our first ever appearance on this distinguished list place us at number 301 nationally ranked by assets under management. In terms of growth of new clients, we ranked in the top 30 nationally and measured by growth in assets under management we were in the top 50. We were the third largest RIA on this list from Central Pennsylvania.
We have been striving to deliver a unique investment advisory experience for our clients. We uncompromisingly have embraced our role as a trusted fiduciary to our clients and for that we believe that we are being rewarded with growth opportunities which have exceeded our expectations.
In summary, to bring the discussion back to the market and investing, we find opportunities one security at a time. For each security which we select, we have quantifiable reasons to believe that we are paying a price for the security which is well below a fair value and we have confidence in our assumptions of growth, profitability and overall quality. We are proud to say that we are active managers who have the discipline and conviction necessary to seek out investment opportunities during times when the consensus says one should avoid any risk. We know full well that the best opportunities will be found during these times and that in order to do what is in our clients’ best interest we need to stay very true to our disciplines and convictions.
DISCLOSURE FOR MARKET COMMENTARY
• THIS COMMENTARY INCLUDES REFERENCES TO CERTAIN INVESTMENT RECOMMENDATIONS BY EHD ADVISORY SERVICES, INC. OUR INVESTMENT ADVICE IS GIVEN IN THE CONTEXT OF EACH CLIENT’S PARTICULAR INVESTMENT CIRCUMSTANCES AND OTHER PARTICULAR CONSIDERATIONS, AND IT SHOULD NOT BE ASSUMED THAT EHD ADVISORY SERVICES, INC. WILL MAKE THE SAME OR SIMILAR RECOMMENDATIONS FOR YOUR ACCOUNT. IT ALSO SHOULD NOT BE ASSUMED THAT INVESTMENT RECOMMENDATIONS MADE IN THE FUTURE WILL BE PROFITABLE OR WILL EQUAL THE PERFORMANCE OF ANY SECURITIES MENTIONED IN THIS MARKET COMMENTARY.
• THIS MARKET COMMENTARY INCLUDES STATEMENTS THAT DESCRIBE OUR EXPECTATIONS AS TO THE PERFORMANCE OF CERTAIN SECURITIES AND INDUSTRY SECTORS IN THE FUTURE. ALTHOUGH SUCH STATEMENTS ARE BELIEVED BY US TO BE REASONABLE WHEN MADE, CAUTION SHOULD BE EXCERCISED NOT TO PLACE UNDUE RELIANCE ON THESE STATEMENTS, WHICH ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. IF THE RISKS OR UNCERTAINTIES EVER MATERIALIZE OR THE ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER FROM THOSE EXPRESSED OR IMPLIED BY SUCH STATEMENTS. PORTFOLIOS ARE SUBJECT TO THE GENERAL RISKS ASSOCIATED WITH PORTFOLIOS INVESTED IN EQUITIES AND BONDS. EXAMPLES OF RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING: THERE IS A RISK OF LOSS OF PRINCIPAL. THERE IS A RISK THAT COMPANIES PURCHASED WILL NOT PERFORM AS EXPECTED. THERE IS A RISK THAT ISSUERS WILL DEFAULT ON DEBT OBLIGATIONS. EHD ADVISORY SERVICES, INC. CANNOT PROVIDE ANY GUARANTY THAT THE EXPECTATIONS DESCRIBED IN THIS MARKET COMMENTARY WILL BE REALIZED.
• THIS MARKET COMMENTARY IS ORIGINAL, WRITTEN BY EHD ADVISORY SERVICES, INC. AND ALL DATA, FACTS AND FIGURES ARE FROM WHAT WE BELIEVE ARE RELIABLE SOURCES. HOWEVER, WE CANNOT GUARANTEE THE ACCURACY OF ANY DATA, FACTS AND FIGURES.
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