Good earnings results meet ambiguous macroeconomic data


Fund Commentary
7 May 2015


The month of April was dominated by earning publications and further interrogations around the US macroeconomic picture. Around a third of the Fund’s holdings announced their results during the month, with the great majority showing once again strong positive surprises.

Constellation Brands opened the ball with higher than expected margins, earnings and an acceleration of their capex plans but gave what seemed as a conservative guidance for the next quarter, leading the shares to underperform the market slightly in the following days. Other noteworthy surprises were Blackrock and Canadian Pacific, both showing stronger than expected earnings in a challenging quarter. Union Pacific disappointed, in what was believed to be an abnormally difficult period due to west coast port closures and rough weather, but without evidence of a challenge to the thesis, this was taken by the Investment Adviser as an opportunity to add to the position. Apple came out with another impressive quarter, with very strong iPhone sales in China and in all likelihood record increases in new customers, boding well for the Apple ecosystem going forward. The company’s generous increase in its shareholder return plan also beat expectations, making its subsequent drop in share price somewhat surprising. Valeant, MasterCard and NXP also surprised positively, with foreign-exchange headwinds proving to be unfortunate but manageable. Thermo Fisher Scientific had to cope with detrimental currency moves as well, on top of slower than expected revenue growth in international markets. However, impressively the company still managed to beat earnings expectations and slightly revised its full year guidance, showing its strong ability to realise further margin improvements in a difficult environment. To this point the Fund’s companies have more than confirmed their earnings trajectories, leading to very little turnover.

The macroeconomic picture did not become clearer, with a first estimation of GDP growth coming out at 0.2%, much below most expectations, hurt by trade and a drop in the energy capex. With inventories building up, the actual picture looks even less exciting, providing more ammunition for the cycle pessimists. The Federal Reserve, publishing its statement later the same day, acknowledged the weakness and largely explained it away as transitory. Supporting the Fed’s transitory perspective was the unexpected rise of core CPI data, bucking the deflationary trend of energy and strong US dollar. A considerable contributor to these startling results was the owner’s equivalent rent which rose 0.3% and contributed heavily to the surprise, possibly showing signs of tightness in the housing market. However with no significant change in the Fed’s language and some mixed macro data, expectations generally remain for it to be patient, data-dependent and accommodating. 

While consensus expectations for the S&P 500 Index had come down significantly during Q1, many companies in the energy and cyclical sectors were able to show slightly less horrendous earnings than previewed, which in turn helped their stock price, as demonstrated by the Energy ETF ending the month up +6.5%. On the other hand, the Fund’s universe of earnings growth, momentum and quality, while generally showing good numbers, often did not receive the appreciation it seemed to deserve. The Investment Adviser remains more than ever confident in the current portfolio’s attractiveness and is looking forward to further earnings reports throughout the month of May. With cash on hand in a somewhat volatile period, the Investment Adviser is looking forward to redeploying capital in compelling opportunities as they materialise.

The views and statements contained herein are those of Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 05/05/15 and are based on internal research and modelling.