A vital component to our investing process is performing our own fundamental research on both the companies that we invest in and the ones that we are interested in. All five of our portfolio managers were trained to analyze public companies from the outset of their careers. We know it is important to track and assess the macro environment, both in terms of politics and the economy. However, it is equally important to understand how a company performs within that ecosystem. As part of that process, we believe there is no substitute for meeting with management. More than any other factor, getting the management assessment correct will determine whether or not an investment will be successful over the long run.
To that end, we have been busy in 2019. Early in the year, we attended a consumer products conference and met with Nestle, Colgate-Palmolive, Clorox, International Flavors & Fragrances, Unilever, Johnson & Johnson, Proctor & Gamble and several others. We also attended a large industrial products conference during the second quarter, where we met with the senior management teams of 3M, Roper Technologies, Stanley Black & Decker, nVent, Honeywell, Emerson, United Technologies, GE, and many others. Shortly after, we attended a Canadian financial services conference, seeing all of the major Canadian banks and life insurance companies. These included such firms as Bank of Montreal, TD Bank, Royal Bank of Canada, Great-West Life and Sun Life.
So far this year, we have also met with a number of companies on a more intensive basis to get a closer look at the “inner workings” of their businesses. These include Thermo-Fisher Scientific, Johnson & Johnson (again), Canadian National Railway, Fortis, Pembina Pipeline, Tecsys, ProAssurance, CCL Industries, Maxar, Stanley Black & Decker (again), and CGI.
While we have not listed them all, we have either seen or met with over 70 public companies in the past six months. This represents more than twice the average number of equity positions in a Rempart portfolio, which typically holds 25 to 30 names.
In meeting with company management, we focus on:
- Quality of management. Does management do what they say they will do, and do they adhere to a consistent business strategy over time?
- Growth in cash flow from operations, and the attendant allocation of free cash flow. Does this allocation make sense for the company specifically, and its industry generally?
- Guidance and longer term outlook. Is management confident of achieving continued growth or are there reasons for concern?
- Does a company appear to be under-valued or over-valued in the market, and how does this impact our investing decisions?
The macro environment is ever evolving, be it economic, political or otherwise. Our touchstone in tumultuous times is the fundamentals of the companies that we monitor. It is these fundamentals that provide us with a level of confidence in the long-term outlook of the companies we invest in, no matter the turbulence that we may encounter in the shorter run.