The first question for investors is how long this initial growth phase will last for?
Certain forward looking indicators, such as the OECD Leading Indicators, suggest that broad market activity is beginning to peak out. In China, the first country to emerge from the pandemic, policy normalisation has started and measures to curb excessive growth are under review. The US Federal Reserve, likewise, has initiated conversations on when to begin tapering. In addition to this, we would note that as we approach the second half of the year, year on year comparisons become more difficult to beat. Hence, we would recommend staying focused on companies with a clear growth strategy, independent of external drivers, which will continue to deliver over the next 1,2 or 3 year time horizon.
The second point we would raise relates to a company’s ability to pass on higher costs and invest in its business. As evidenced by the rising inflation numbers, input costs for companies have been ticking up since the end of last year. In our view, companies with a strong competitive advantage, such as a market leading product, a trusted brand or a unique technology, and entrenched relationship with their customers are best placed to ride out higher input costs and maintain margins. Tightening liquidity will also place strains on corporate spending, except for those with healthy balance sheets. Sticking to quality companies will become increasingly important as we go through the rest of the year.
Where can investors find these stocks?
A number of stocks have caught my eye recently, amongst these is Generac, the US manufacturer of standby generators. Thanks to its best-in-class product offering, Generac is the market leader in the US. Not only that, whilst competitors are grappling to secure supplies and facing production disruption, Generac’s superior inventory management system and well thought out capacity expansion mean that, in contrast to the rest of the sector, the company continues to grow.
Dunelm, in the UK is another example of a company which reaping the rewards of investing in its own business. The company’s online rollout has been very successful, which together with its revamped product line up of homeware goods is driving significant market share gains.
A small cap gem which we have owned for many years is Voltronic. The company supplies solar inverters and UPS (uninterruptible power supply) units to Tier 1 electrical giants such as Schneider and Eaton. Management flagged rising raw material prices to us back in November. Because of its long standing relationship with clients, who trust Voltronic’s product reliability, durability and delivery capability, the company has been able to raise prices 3 times in the last 6 months to maintain margins.
Last, but by no means least, Reply, our Italian IT services provider and systems integrator, has been making use of its robust financial position to snap up various acquisitions and further enhance its expertise and product offering. Reply’s scale, profitability and focused strategy means it is in prime position to benefit from increased demand in the sector.
