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COVID-19 has boosted business for some companies. It has also had a severe and negative impact on others. For businesses landing somewhere in the middle, adaptability is key. Stu Kedwell, Co-Head of North American Equities, joins Dave to reflect on what investors can take away from an exceptional earnings season. (Recorded August 6, 2020)


Hello and welcome to the Download. I’m your host, Dave Richardson, and we are here with Stu’s Days. Although you might notice it is not Tuesday today. For many of us in Canada, for those of you internationally or in provinces other than Ontario who don’t know, this was a long weekend. Most of us who live and work here in the Toronto area had Monday off. And that usually pushes our garbage pickup a day or two back. So we’ve done the same thing with the podcast. But I also found out that Stu’s middle name is Thurston. So it’s Thurston’s Thursday, here on the Download podcast. Thurston Stewart Kedwell, the third. Welcome to today’s edition.

Great. Thanks for having me, Dave. A couple of days late, but better late than never, right?

Absolutely. Now what it’s given us is a chance to really get all the way through earnings season. We always take a look forward at earnings season on Stu’s Days. But, [we have] a chance now to look back at a couple of things that we were talking about. One is the way companies are reporting, and surprising to the upside. And yet, some thoughts around expenses, and just the way stocks are reacting when earnings are announced. So why don’t you take it from here with some of your observations?

Great. Thanks, Dave, and thanks to everyone listening. Some of the things that we’ve talked about in the past are how management teams adapt their business for the environment that sits in front of them. We’ve seen time and time again the things that we’re worried about, and what our investors are worried about. That maybe causing a delay in investment, because you think things might get worse. You go and have those discussions with the management teams, and they are on the same list as you are. They are worried about it, and they’re adapting their business. And that’s what we call a “positive option” that comes to shareholders. The idea that management will adapt their business for the environment at hand. What we’ve seen through this reporting season has been interesting. We’ve seen the large companies - the Apples, the Facebooks, the Microsofts - do extremely well. Strong revenue, strong earnings. Very much expected, very much needed to keep their share prices at these elevated levels. Then, we’ve seen other businesses that might be very impacted by COVID-19. And they’re trying things. These are more like the hospitality businesses and what have you. Direct impacts. They are adjusting their business, but it’s still been tough. But there’s this wide swath of businesses whose revenues have been challenged by the broader slowdown, although not specific to COVID-19. And as they’ve reported, it’s not that their revenues haven’t been pressured, it’s just that they’ve surprised people on the expense side. Just as we would have imagined, they manage their business for this environment. It’s meant maybe less marketing spending, maybe a little bit more efficiency on some things. And those businesses have come through with somewhat surprising earnings. These are quite pedestrian companies, the types of things that grow a little bit better than the economy over time. But as the efficiencies come through, people say, “Boy, this balance sheet is going to make it through and these earning streams are going to make it through.” Sometimes you see businesses that would never have gone up seven, eight, nine percent in the day. They’re doing it in this environment because they’re allowing investors to look at these companies and say, “Hey, they’re going to make it to the other side. Now I can go value them on a more normalized type business environment.” That’s been a pleasant surprise in the last week because, while we have exposure to the likes of Apple, Microsoft, Facebook and the big US funds, we also have plenty of these other businesses. It’s been nice to see them rewarded in the stock market as they’ve presented the fruits of a lot of hard work from these management teams on our behalf.

Yes, it’s incredible. It all rolls up. If we’re looking at perhaps the most widely followed index around the world, particularly by professionals: the S&P 500. It’s sitting now less than 2% below its all-time high in February from the depths of being 35% below that. It is absolutely remarkable. And I think what you’re suggesting here is the incredible adaptability of businesses around the world to whatever environment, whatever challenges you throw at them. Of course, we prefer it not to work out this way, but it is quite remarkable as you start to see these earnings come through. The way companies adapt and the way their stocks perform out of the announcements.

Dave, in my office I have all these things pinned to the wall I like to look at to remind myself of different environments. One of them is a story from one of my dad’s favourite movies, Butch Cassidy and the Sundance Kid. There is a period in the movie when Sundance Kid is asked to shoot a piece of glass and he’s standing and he shoots… and he misses. And the guy says, “Well, obviously you’re no good. And he says do you mind if I move? Go ahead.” He moves, and he shoots it, and he just bangs it three or four times in a row. And he says, “I shoot better when I’m moving.” And that’s something that always reminds me of company management. They are always adapting the business on your behalf.

Yes, and I think from everyone’s perspective, we’re always happy when things bounce back. People who maintain that long-term focus are rewarded for their discipline around investing, and perhaps this cycle has been a better reminder of that than any. So Stu, we’ll be back to talk about the banks in Canada. And thank you as always. And a great story Thurston!

Thanks for listening and thanks for everyone’s time. Have a good weekend.


Recorded August 6, 2020

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