3 themes QVG identified during reporting season and 2 reasons for optimism
February’s reporting season was unusual. At a time of year when focus is typically on earnings, these were largely overshadowed by macro-economic events. War and dramatic moves in rate expectations and commodity prices created a difficult backdrop for fundamental stock-pickers. Despite this, reporting season offers a great opportunity to have one-on-one conversations with management teams. From these meetings, three themes jumped out at us.
The following were common talking points from the companies we spoke to:
Wages & Staff Turnover
- Inflation & Costs
- Inventory & Supply Chain
Wages & Staff Turnover
Almost all companies we spoke to over reporting season saw wage inflation and some level of increased staff turnover. These issues were especially acute for technology companies. The bearish news here is that until international borders reopen with gusto, CEOs were not optimistic about slowing wages growth.
Inflation & Costs
As well as wage increases, price increases for goods and freight was a common feature of conversations. Most CEOs believe there’s some evidence of goods inflation starting to normalise but believe freight costs are likely to stay elevated. Freight costs won’t be helped by the oil price going bananas lately.
Inventory & Supply Chain
In response to congested supply chains, some businesses have decided to carry more inventory. This was noticeable in a period when consumer-facing companies are usually carrying less inventory having sold through stock at Christmas. While there is an expectation that supply chain pressures will ease this year, most managers have stocked up in anticipation that stock availability won’t ease until the middle of the year at the earliest. Getting caught with too much stock into a consumer downturn is a risk for some consumer cyclicals.
Cause for optimism
Despite the pressures mentioned above, most corporates (or at least the ones we talk to) are optimistic about their ability to pass on cost pressures. At QVG we favour companies with growth and pricing power which allows them to maintain margins and grow earnings in real terms. This pricing power combined with a decent correction in small industrials, gives us cause for optimism around future returns.
Find out more via QVG's upcoming investor webinar
If you're interested in hearing more from the QVG Capital team please register for our upcoming invest webinar to be held on March 15. The webinar will cover the recent reporting season, QVG's portfolio positioning and the outlook for our funds. Register Here.
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Chris Prunty is a co-founder and Portfolio Manager at QVG Capital; a boutique investment management firm specialising in smaller companies. QVG manages money on behalf of high net worth individuals and institutions in a 'best ideas' portfolio of...