We recently sat down with the Specialized Asset Management (SAM) team at Baird to give us some insights on the 1st quarter earnings season and their thoughts on the market as a whole.
Q: Tell us a little about the SAM team and the type of portfolios you manage.
A: Specialized Asset Management (SAM) builds portfolios exclusively for Baird’s high net worth clients. Our portfolios are designed to be understandable, customizable, tax efficient and provide downside protection. The SAM team averages 21 years of experience.
Q: What have you seen in the markets leading up to this earnings season?
A: Companies (and all of us) are navigating unprecedented challenges with limited visibility. Good management teams, solid balance sheets and high returns on capital and steady cash flow are absolutely imperative. These attributes allow companies to focus on strengthening their competitive position for the long-term. We include a handful of management quotes below that highlight this mindset.
The market ricochet over the last three months has investors feeling whipsawed and exhausted. The volatility is challenging but we are using it to opportunistically upgrade the quality and growth rate of our portfolio. We remain patient and methodical with our approach. We are focused on buying what we think are great companies that should emerge from this downturn better positioned to win over the long-term.
Q: What are your takeaways from 1Q earnings?
A: The most obvious takeaway from the 1Q20 earnings season is that companies are operating in an unprecedented environment that is completely unpredictable. Companies are therefore given a free pass to withdraw guidance, which most did. Anecdotally most are expecting a bottom in 2Q and some form of a rebound in the second half of the year as economies reopen. The pace of that recovery is also up for debate with a lot of letters being thrown out to describe the shape: V, U, W, L, and even square root.
Instead of trying to optimize our portfolio for the potential slope of the recovery, we remain steadfast in buying high quality companies with solid balance sheets and good management teams that can navigate any environment and effectively adapt to new regimes. SAM’s focus on buying quality businesses has never been more important.
We believe the strong will emerge stronger. As part of our process, we listen to every earnings call for our portfolio companies. While our companies are impacted by COVID to varying degrees, one key theme we hear is that the strongest companies heading into this downturn will emerge stronger coming out. Companies that do not have to worry about surviving but can instead focus on capitalizing on the market disruption are best positioned for the long-term.
And we completely agree with Warren Buffet, Chairman and CEO of Berkshire Hathaway. “Never bet against America. That is as true today as it was in 1789, during the Civil War, and in the depths of the Depression. American magic has always prevailed, and it will do so again.”
We have plenty examples of resilience and ingenuity in the SAM portfolio. The quotes below from recent earnings calls highlight this theme. Enjoy!
- “Our financial strength and margin cushion gives us the ability to prioritize playing offense in the recovery over playing defense in the contraction… My focus is not on what our results are going to be over the next couple of quarters, rather winning the recovery phase is what matters. And that is what we’re going to be focused on throughout.” – Ernest Santi, Chairman & CEO Illinois Tool Works
- “As COVID-19 impacts every aspect of our work and life, we have seen two years’ worth of digital transformation in two months… There is both immediate surge demand and systemic structural change across all of our solution areas that will define the way we live and work going forward.” – Satya Nadella, CEO Microsoft
- “One might argue that our competitive advantage will be improved. We're in better shape than most of our competitors to handle a situation like this. We will have great customer relationships as we demonstrate we're the right partner, particularly when the going gets tough.” – Douglas Baker Jr., Chairman & CEO Ecolab
- “I do think that, in general, our competitors are cash constrained, in fact, I know they are. And what that means more than anything is we have the ability to invest in the products and services and some staff. We should, as we did in the last recession, be able to take even more share than we would during normal times.” – Mark Joslin, CFO Pool Corp.
- “NIKE has a long history of rising to the occasion in extraordinary times, to deliver strong results and affect extraordinary change in the world of sport and beyond, and that’s what we’re going to do once again.” – John Donahoe, CEO Nike
- “We have tons of liquidity, but I don't believe we're going have to utilize that liquidity to stay afloat. I want to utilize that liquidity to play really aggressive offense.” – Andrew Silvernail, Chairman & CEO IDEX Corp.
- “Johnson & Johnson is built for times like this, and we are leveraging our scientific expertise, operational scale and financial strength in the effort to advance the work on our lead COVID-19 vaccine candidate.” – Alex Gorsky, Chairman & CEO Johnson & Johnson
- “I’ve always believed that in times of economic downturn, the right thing to do is to keep investing and building the future… And we’re in a fortunate position to be able to do this.” – Mark Zuckerburg, CEO Facebook
- “If you’re a shareholder in Amazon, you may want to take a seat, because we’re not thinking small.” – Jeff Bezos, Chairman & CEO Amazon
- “We are not planning on cutting growth CapEx. We're in a strong cash position. Those projects are high-return projects. I'm not planning on sacrificing the future just to cut back on CapEx.” – Darius Adamczyk, Chairman & CEO Honeywell International
- “We continue to invest in our competitive advantages and in making our business stronger. History has shown us that… in times like this, it’s when we can make the most strategic progress.” – Rafael Lizardi, CFO Texas Instruments
- “Digital transformation was a business imperative pre-COVID… Post-COVID, digital transformation will accelerate, and ServiceNow is the workflow standard for digital transformation.” – William McDermott, CEO ServiceNow
Feel free to reach out with any questions,
The Planning Group of the Northwest
Robert W Baird & Co, Incorporated