Does anybody drink during a recession?
Yesterday, as I would have expected, Coke posted strong results despite a feeble U.S. economy. In large part, this was because 80% of their profits come from overseas, and global unit case volume grew 5%, offsetting a slight decline in the U.S. market of 2%. The irony is that during intraday trading, Coke shares were being sold off like everything else, down 4.7% at one point.
Based on the way the market is pricing Coke, you’d think nobody drinks during a recession. This goes to show the volatility of the earnings of the businesses we own are not gyrating as wildly as their stock prices would indicate. Thus, market prices are not moving based upon objective facts, rather, fear is trumping logic.
During this time when everything is being sold without regard to the fundamentals, it would do us well to remember that the price of a stock does not dictate the value of the underlying business. The value of a business is simply the present value of all the cash that a business will generate over time. Speculators are “instructed” by the market as to what the value of a stock should be, whereas investors are “served” by the market which conveniently offers them attractive buying and selling opportunities.
The key is to find out which companies still have strong fundamentals despite the downturn, and they will emerge as the winners. True, many businesses will find difficulty being fully recession proof, but this does not mean the earnings of these companies are in permanent decline. Since the market becomes emotional, it is apt to over accentuate the short term reduction in earnings, making recessions the best environment to find opportunities for the patient investor.
Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.