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About this podcast

From showing up early, to preparing and sticking to a list of necessities – managing portfolios is a lot like going shopping. Inspired by a recent trip to the hardware store, Stu Kedwell, Co-Head, North American Equities, discusses his portfolio construction process, and why it’s not only about identifying good companies to invest in, but also understanding what’s required for these companies’ share prices to be successful. (Recorded June 9, 2020)

Transcript

Hello and welcome to the Download. I’m your host, Dave Richardson, and I’m joined again by Stu Kedwell, for Stu’s days on the podcast. And Stu was telling me a story just before we got on. He is the first one at the Home Depot when he goes there on a weekday morning, at six a.m. And when you get there at six a.m., it’s the best time to be there, it’s perfect! Because you know you’re going to get there and there’ll be no line-up, you’re going to be able to get right in. But then, you’ve got to go in and you’ve got to get the right stuff. And it’s an analogy that ties to something Stu is thinking about with respect to the market. And Stu, we’re talking about the bounce off the bottom, how that takes place, but then things change and why don’t you take it from there?

That’s a good analogy, Dave. Thanks for having me again for the Tuesday podcast. As investors, we look for situations where we can be generally right without being specifically right, and knowing that we have a reasonable outcome and the odds are in our favour. And when we think back to the last couple of months, in the middle of March, when the selling was quite intense, it was easy to say that things eventually will get better. So you could be generally right without having specifically predicted what the employment data may have looked like last Friday, which accelerated the markets one more time after a very powerful two-month rally. So your analogy of Home Depot was a good one. When I show up at six in the morning, I know it’s going to be empty, so I’m going to get in and out pretty quickly, versus when I go later in the afternoon, I have to know exactly what aisle I’m going to get to to make my trip more efficient. So that is something that’s going on in the market right now, as we’ve had a very, very strong rally. And the next phase of this is going to be very much discussing certain companies that can continue to prosper and have reasonable valuations relative to the prospects that they might have in front of them versus, we have generally been in a period where rising tides have lifted all boats and markets have done very well.

Yes and so this is something we talk about, and one of the reasons why this podcast is about talking to professional investors, people like yourself who have been a professional investment manager for two decades. What is then the key, following the analogy once you get into the Home Depot and you’re picking the right piece of lumber, so in this case, you’re in those markets, those markets have risen quite a bit. How do you identify the right investments to make? What’s the process you’re going to follow?

It’s a similar process that we use every day in and out. So the first thing that you’re always looking for is identifying good companies and good companies have good management teams, they have good balance sheets and they have opportunities to take the cash flow that their businesses generate and reinvest it, on your behalf, to grow the business into the future. But the thing that we have to pay more attention to in junctures like this in the market, is: when are good companies good stocks? And the first thing is, if we pick good companies, and this is this is what we’re dealing with first and foremost, they will bail us out if we’re a little bit wrong on our forecast, because those management teams are busy in the background, diligently trying to grow their businesses. But then what we have to ask ourselves is, we look at these businesses and say: what different scenarios might lie in front of them and what would be required to make the stock successful from the share price? And we can go across a wide swath of companies; we have some, where the economy needs to boom in order for that to be a successful share price. And we have others, where the economy could meander, and that share price could still be successful, then we have a logical switch within the portfolio. So we can take two good businesses and say: well, that’s interesting, this one is priced for a very rambunctious economy and this one is priced for a very pedestrian economy. And at the end of the day, we both know that they’re going to operate in the same economy. So, that’s an example of how we try and maneuver the portfolio around, based on assumptions, looking at each company and saying, well, what is required for this company’s share price to be successful, because if we’ve done the first part, we know that it’s likely to be a successful company. But what’s required to make the share price successful from this level?

Yeah, and that is, as I say, takes a very disciplined process. It takes a lot of experience. And, just like, again let’s finish off with the analogy; when I go shopping, even with a list, I always forget something. So it’s having that process. It’s checking back. It’s making sure you’ve done all your due diligence to make sure you come home with everything you’re supposed to come home with. And in this case, putting together the right portfolio for investors. So, Stu, thanks for that. I understand you’ve got some building to do, after you finish your investment management today (we’re recording here in the morning). So good luck with the building and thanks for joining us again today.

That’s right, portfolio construction, Dave.

Absolutely. Take care.

Thanks very much.

Disclosure

Recorded June 9, 2020

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