Trade wars. Trump tweets. Bitcoin. Inflation worries.
Every day there’s some hot new topic that’s driving headlines, either stirring up fear about a looming bear market or fueling speculative frenzy as people pile into some new kind of investment. While headline news makes for interesting reading, it can create anxiety and uncertainty for investors.
That’s why it’s so important not to get distracted by the noise. Remember: good investments aren’t tied to the daily news cycle. A well-built portfolio should consist of investments with solid fundamentals—that important, core data that shows investors whether a specific security is going to do well and perform the right role in a portfolio.
The good news is, that is exactly how we work. We don’t buy economies or policies. We buy investments from governments or companies that aren’t solely tied to any short-term buzz from inflation or rate-hike expectations, political scandals or quarterly earnings releases.
Back to basics
We prefer to stick to the basics of stock selection—the core research and analysis that shows us how profitable a company will be and what its prospects for growth are in the future.
For example, one of the many measures we use is return on equity (ROE) which measures the profitability for a business. We look closely at a company’s balance sheet and income statement to determine how strong and stable those profits are likely to be. That includes factors such as how much a company spends to generate profits, sales, and how the company is using any debt.
When you look at a company in this way, you can then ask how it might be impacted by headline news or policy changes. Often, the answer is not much.
So what kinds of companies have we chosen based on our analysis? Here are three we hold right now that have a healthy long-term outlook:
Starbucks is a great example of a company that has experienced some negative headlines lately. Despite the bad news, it remains a strong investment. It is a leader in the food and beverage service industry and a big part of its success is its loyalty program and mobile capabilities.
Starbucks is also investing in the developing coffee market in China—a massive opportunity where mobile payments are a big part of the business too.
Combined, all of these strengths translate to impressive returns on capital. In other words, their investments have made them more profitable and they’ve shared those profits by returning that cash to shareholders like us.
Dollarama is the leading dollar store chain in Canada with more than 1,000 corporate-owned stores spread across the country. We like the company because of its highly recognizable brand, attractive store network, and the fact that it consistently provides value to its customers through merchandise assortment and product quality for a low price point. This has helped them build customer loyalty and brand awareness, which gives Dollarama a major competitive advantage over its peers.
The company also has strong free cash flow—that means it generates profits with relatively low operating costs. Dollarama has also seen a solid return on the cash it’s invested to grow—another reason we expect this company to continue doing well in the future as it grows.
Founded in 1887, Kao operates in the beauty, fabric and home, human health, and chemicals sectors. While 66% of the company’s sales are in Japan, its main growth region is in the rest of Asia.
We like the stable growth of Kao’s business in Japan and its focus on expanding further into high growth Asian markets as living standards improve.
Kao’s business is all about stability: regardless of what’s happening economically, customers always need detergent, deodorant and diapers. The company has also distributed its profits through dividends—those regular payments to shareholders that also make it a good investment.
The bottom line
What does all this mean for you and your portfolio? The good news is, you can relax a bit and read headlines to stay informed, without worrying about your investments. Through research and analysis, we use our knowledge and expertise to choose investments that are set to perform well all on their own, no matter who gets elected or where interest rates are headed.
About the Author
CRAIG MADDOCK, CFP, CFA, CIM, MBA, is Vice President with the Investment Management team at MD Financial Management. He leads the team of portfolio managers and investment analysts responsible for managing the firm’s mutual funds and investment pools.More Content by Craig Maddock