Remember Chicken Little | Redmond Asset Management

Remember Chicken Little

??????????? Many of us are familiar with the folk tale about a chick struck by a falling acorn that becomes so hysterical and panic-stricken that it fails to correctly assess, prepare, and execute a strategy for the dangers around him. We, at Redmond Asset Management, believe that the current slow?growth economic environment and the uncertainty in the U.S. and across the globe provide a unique opportunity for companies and investors. Those that move past a ?sky-is-falling? emotion and focus on long-term fundamentals could benefit handsomely. After considering a range of uncertainties that confront us, focusing on the data we do have, and emphasizing a bottom-up approach, we believe that investors have ample investment opportunities in quality growth companies at reasonable prices.

??????????? Business leaders and investors should consider all the uncertainties facing the U.S. and the global economy because the outcomes will affect economic growth and the level of uncertainty does shape investment decisions. Change is constant and so uncertainty is always present. It tests us with both an intellectual challenge ? a lack of reliable data, and an emotional challenge ? the fear of the unknown. Below we identify some uncertainties, with our commentary.

The Uncertainty?	Our Commentary
U.S. Presidential / Congressional Elections	Most agitating but a discrete end (11/2012)
U.S. Fiscal Cliff: Future Taxes and Federal Spending	Market views that not all of the cliff will occur. Very little consideration that taxes may be lower for some.
U.S. Monetary Policy & Future Interest Rates	More when than if rates rise. Little consideration given to positives that may precede rising rates.
Israel/Iran, Middle East and Cyberterrorism threats	The most unknowable and scariest.
When will housing recover?	This seems to be happening now!
Little Discussed Positive Uncertainties	Manufacturing rebound, energy self-sufficiency, infrastructure improvements, future innovation.
What will be the Level of Economic Growth?	Slower growth may mean a longer growth cycle overall; individual companies can far exceed market growth.

The awareness of coming change and potential impediments is a valuable quality if it sharpens focus on real issues and leads to innovation, problem-solving, and successful execution. It is crucial that uncertainty does not lead to paralysis, to ignoring available data, or to forgetting that uncertainty often precedes positive changes, too. Companies that innovate, dominate their industries, and continue to execute well during uncertain times will separate themselves further from the average company ? and owners of these companies will benefit.

While economic growth continues to be slow, growing GDP is the important factor. In the U.S., nominal GDP in 2011 was over $1 trillion higher than it was in 2007, when the equity markets previously peaked. In the year of 2012, U.S. and global businesses are competing for economic activity up for grabs totaling roughly $600 billion and $4 trillion, respectively. When pessimism abounds it is important to remember that people, around the world, wake up every morning with the goal of improving their situation. The economic pie is growing and will continue to grow; the question is who gets it? It?s certainly not, to a meaningful extent, going to fall into the laps of companies only operating as usual or taking a wait-and-see approach during periods of great change. A disproportionate amount of this growth will be earned by better companies. Investors in dominant and innovative companies should be comforted that GDP is growing and should expect higher levels of growth from their companies.

While recognizing that the GDP pie is growing, periods of slow growth accentuate the effects of competitive forces. Capitalism is economic Darwinism, which is the survival of the smartest, the most adaptive, and the fittest. Across each industry there are winners and losers ? indeed, over time, companies and entire industries eventually die. However, from those ashes rise phoenixes, companies with new ideas, with better products and better services that benefit society.? A recent example that occurred during the Great Recession was the impact smartphones and tablets had on the PC industry and the concurrent improvement of communication, productivity and entertainment delivery. Similarly, renewed focus on operational efficiencies, and smart human and financial capital allocation decisions have allowed strong companies to become stronger and take market share from weaker ?Chicken Little? companies. These investments during tough times pay off now but they will pay off even more when the economy improves. History shows us that these attributes allowed quality companies to successfully navigate uncertainties of the past and we believe it will happen again. Owners of quality growth companies should expect competitive positions to strengthen, market share to grow, and relatively strong levels of earnings growth, even in times when the overall economy is stagnant.

While well run companies that occupy a niche or dominate their industry cannot be expected to prosper in an economic collapse, they should greatly outperform overall levels of GDP growth in the type of slow growth economy of the past few years. We do not predict that stock markets or even the stocks of the most dominant companies will experience a never-ending march upward. However, we agree with Benjamin Graham, famous investor and mentor to Warren Buffet, that equity investors will do better if they forget about the stock market and pay attention to the operating results of their companies. Equity investors should focus on finding innovative and dominant companies and take advantage of ?sky-is-falling? reactions to build investment portfolios that will generate real wealth for years to come.

Jeremy B. Kirkland, CFA?????????????????????????????????????????????????????????????????????????????????????????? October 2012

Important Disclosures:

This blog is for informational purposes only. The statements contained herein are solely based upon the opinions of Redmond Asset Management, LLC and the data available at the time of publication of this report, and there is no assurance that any predicted results will actually occur. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. This blog contains no recommendations to buy or sell any specific securities and should not be considered investment advice of any kind. Past performance is no guarantee of future results. In making an investment decision individuals should utilize other information sources and the advice of their investment advisor.

Source: http://redmondassetmanagement.com/2012/10/remember-chicken-little-2/

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