YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

A Shift to Quality

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Since the March lows we’ve watched the S&P 500 index rally over 50%. The rally has been fueled primarily by cyclical, lower quality stocks found in the financial, material, and retail sectors to name a few.

Investors have rushed into economically sensitive stocks as their appetite for risk has increased. One can’t help but think there’s an element of investors putting cash to work in fear of missing out on a further rally. Whether the rally continues to run up or if we’re ready for another significant pull back is anyone’s guess, but here at YCG we are taking this opportunity to shift to quality. If we had to choose, we would side with a market correction taking place. With all this talk of a rebound and the economy improving, we scratch our heads and look around and think to ourselves…the economy is still struggling and facing some pretty big demons. We are very concerned with the amount of debt that the U.S. government and consumer continues to carry and we fear the day of retribution and consequence will come all too quickly from such frivolous spending. Unemployment could get worse before it gets better and earnings expectations for many companies seem way too optimistic.

Such a dismal picture makes us favor the high quality, multi-national corporations or blue chip stocks even more. And what’s even better is that these stocks have lagged or are even negative still for the year despite the huge run up in the broader market. In our minds companies like Coca-Cola, Proctor & Gamble, Pepsico, and Walmart are incredibly attractive and purchasing equity in such solid businesses now will provide handsome returns and downside protection during the next few unpredictable years.

We have been moving out of names like Americredit (ACF), Carmax (KMX), and Home Depot (HD) and shifting the proceeds to higher quality names aforementioned. We feel way more comfortable doing this and we will continue to make this transition. In our minds it’s all about protecting money on the downside (allowing the compounding effect to work its magic) and letting the upside take care of itself.

And we are not the only ones that feel this way either. This week’s cover story in Barron’s titled “Quality Counts” agreed with our assessment and stated that these “…quality stocks soon could start to shine.” They had a list of 12 stocks that they highlighted of which six we own and also see great value as shareholders. The six are: Comcast (CMSCA), Microsoft (MSFT), Nestle (NSRGY), Pepsico (PEP), Procter & Gamble (PG), and Wal-mart (WMT).

Another top holding of ours is Coca-Cola (KO). This is a company that generates piles of cash with a majority of its revenues coming from outside of the United States. Barron’s, in a separate article over the weekend, published a piece titled “Coke’s Fortunes Are Set to Pop.” In our minds, it won’t be long before investors start to see the tremendous value and start buying up shares of these high quality companies that are on sale at bargain prices.

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.

Posted by: Will Kruger | August 17, 2009 | Permalink

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