Taking Stock - It's All Relative
Date: 02 August 2022
Northern Ireland’s women footballers ended Euro 2022 with a record of played three, lost three. They conceded eleven goals and scored one – the worst goal difference in the tournament.
But consider this, they were also the lowest ranked team in the tournament. This is the first time that any women’s football team from Northern Ireland has qualified for a major tournament. For most of the 90s and the early 2000s the team barely existed. Prior to qualifying for Euro 2022, the majority of the squad were juggling football with full time jobs – Kirsty McGuinness worked at a B&Q, Lauren Wade was a funeral director.
The point is this – performance needs context. For a side as well established as England, exiting at the group stage would have been an unmitigated disaster. For Northern Ireland, this is a major step in the progress of the team and probably life changing for the players. Everything is relative.
Which brings us to the quarterly jamboree that is earnings season. You might think that asking incredibly complex, globally operating public companies to report earnings every three months is overkill (I would agree) – but it provides us with a relatively real time insight into what is happening at the coalface of the economy. This does feel like an important reporting season considering the year that we have had so far, but bear in mind that a company’s absolute performance (revenue growth, earnings growth) does not matter in isolation. What matters is where these numbers come in, relative to the market’s expectations.
Let us consider two companies – Company A and Company B*. Company A saw their user base increase by 18% over the prior twelve months to the end of the second quarter, and an increase of 13% in revenues during the same period. Company B on the other hand lost a million customers during the second quarter alone and announced a fundamental change to the business model that had propelled them to the leading spot in their market.
Naturally, since these announcements the stock price of Company B is up 13%, while shares in Company A have lost almost half their value. Why? Company A fell short of the market’s expectations – while Company B reported numbers which were better than feared.
I am not even sure that past earnings numbers particularly matter this time around. We can all see that we are living through a time of economic flux, and as such, investors are focussing on what companies are saying about the future. However, it is always worth remembering that when the Chief Executive of a company speaks, they are not just talking to investors. This is public information which is available to their customers, employees and competitors too. What you say will invariably be received in different ways by each of these stakeholders. This juggling act means that it can be best to take what is said by companies with a pinch of salt, on occasion. Should CEOs be overly cautious in what they report to the market, reset expectations and accept a likely short term hit to their share price? Or should they sound a little more confident, whether they actually feel this way or not?
Putting myself in the shoes of a business owner I would be less concerned with where the rate of inflation settles down, than in seeing the end of wild swings in inflation. If your input costs are rising at a constant rate of 5%, that number may not be ideal, but you can at least plan ahead for this. It is volatility and large oscillations in the price of inventory which make guidance really difficult. This is a point that myself and Richard Carter discuss during a recent market update for clients which you can listen to here if you have a spare half hour.
What we have heard so far during earnings season probably confirms what we all feel in our day to day lives. Rising costs have been hurting some businesses – the question is which companies are able to pass on these rising costs to their customers while continuing to grow. If you sell chocolate or coffee (Mondelez) you are still seeing reasonable demand from your customers. However, if your business is big ticket items (Wickes, Made.com) you are starting to see demand roll over as customers prioritise the necessities over the “nice to haves”.
The availability of information to investors, relative to fifty years ago say, is night and day. This can be both a blessing and a curse. While we have access to almost countless metrics for the performance of stocks and feel that we are making better informed decisions as a consequence, this wave of information can be overwhelming. The simple truth is that for most long-term investors the vast majority of information does not matter. Good companies thrive in spite of geopolitical uncertainty, inflation or politics. Investors in these businesses benefit from rising earnings, share price growth and dividend payments. The world continues to turn.
We are all at differing stages of our financial journey, and what matters is sticking to your individual plan. Best buy lists and fund comparison tools are helpful for transparency – but not if you end up playing financial “whack a mole”, constantly chopping and changing to chase what investment style or stock happens to be working right now. It is unhelpful, and frankly exhausting. The right investment strategy does not necessarily “shoot the lights out” year in year out (although that would be nice!), but instead allows you to a) remain invested to meet your long-term goals; and b) sleep at night. Unremarkable progress over long time frames can produce remarkable results. Hopefully in thirty years it’s the Northern Ireland team lining up at Wembley in a final.
If you would like to drop me a line directly, you can do so here.
Have a great week.
*Snapchat and Netflix if you’re interested.