“Davidson’ submits:
The process of better investment research requires removing the silos between those who do ‘Top Down”, ‘Bottom Up’ and gross economic trends. Through the process of identifying the better CEOs, one does not get bogged down in the endless details of any industry. One simply learns to trust which CEOs have been good at handling the myriad of details involved with corporate management and invest with them during periods of high investor pessimism. The better CEOs provide far better insight on conf calls regarding their own industry and the industries of their customers and at a level well above what any analyst could possibly attain. In the process of tracking multiple CEOs from multiple sectors, one can make broad connections across the entire global economy.
Combining CEO commentary with broad economics, permits one to identify those issues which are most important to estimating business trends and market valuations. This is the Value Investor approach.
Below is a partial list of individual issues where the CEOs are currently providing me with investing insight. I generally track about 200 companies, but at any one point in time have 40-50 in a portfolio. I focus on the CEO skills and not overly sensitive to market capitalization or business sector. The greatest risk to investment expectations lies more with a change in CEO than it does with a company’s offerings becoming uncompetitive. Good CEOs in my opinion maintain their performances across business cycles and product cycles.
These issues have historically produced total returns more than 15% vs. SP500 at 6% including dividends. A number of them have dividends exceeding 3%.
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In the industrial area Pentair(PNR), Danaher(DHR), Praxair(PX), Colfax(CFX), Fortive(FTV), Kansas City Southern( KSU), Balchem(BCPC) specialty chemical, Allied Motion(AMOT) electric motors used in medical, defense, transportation markets, Fastenal(FAST) industrial parts/safety product distributor, Caterpillar(CAT) construction, mining, agricultural machinery.
In energy area Exxon Mobil(XOM), General Electric(GE) industrial, aerospace, energy, Chart Industries(GTLS) gas compression systems for natural gas, industrial and medical gases.
In defense Astronics(ATRO), Heico(HEI.A), Transdigm(TDG), Graham(GHM) both industrial/defense
In medical Gilead(GILD) 1st cure for Hep C virus,, Neogen(NEOG) genetic based food testing, Neogenomics(NEO) cancer drug testing-genetics,
In food area AM Invev(BUD), Flowers Foods(FLO), J&J Snack Foods(JJSF), Kraft Heinz(KHC)
In finance First Data(FDC) bank and retail payment systems,
These 25 issues vary by market cap. The most important element is the history of management and in particular the skill sets of each of the CEOs. By monitoring CEO commentary, it is if one has a very well informed ‘staff’ monitoring all aspects of economic activity at one’s fingertips.
CAT for example was recommended in April 2016 when it was between $75-$80shr and experiencing high investor pessimism. It remains a portfolio suggestions today at $108shr. Market prices reflect investor psychology to unexpected economic events. With the US exiting its recent industrial recession and the US$ falling back to its historical trend, CAT should have several years of better than expected business returns. Higher equity prices should follow.
On successive conference calls, CAT’s CEO provided the insight which let one invest when most investors were selling in panic. CEO Oberhelman commented on several calls that they were adjusting and then later, had adjusted to the strong US$ impact and saw stability. Combining his commentary with commentary of dozens of other impacted corporations and merging this information with economic trends provided enough information to initiate CAT as a portfolio suggestion.
One of the useful economic indicators is the Chemical Activity Barometer(CAB). The CAB leads by two to fourteen months, with an average lead of eight months. The CAB is a composite index which is comprised of indicators drawn from a range of chemicals and sectors, including chlorine and other alkalies, pigments, plastic resins and other selected basic industrial chemicals. It first originated through a study of the relationship between the business cycles in the production of selected chemicals and cycles in the larger economy.
The CAB reported this week at 117.46 is at record levels. Couple this to employment trends in industrials and CEO commentary, provides expectations for several years of economic expansion.
By working across the various silos and letting the better CEOs handle the details, one can blend Top Down with Bottom Up for major opportunities as they present themselves. The CEOs continue to tell us that conditions are improving and this is affirmed by economic trends.
Higher equity prices are likely.