Good Earnings Drive Good Returns

At the end of the day, earnings are what drive stock prices. Companies that make money, and particularly those that grow their earnings year after year, see the prices of their shares rise. Companies that lose money, no matter the amount of hype or publicity, ultimately see their shares fall. These twin truths are particularly important to remember in this year of “meme” stocks, crypto craziness and Robinhood retail empowerment.

The 2nd quarter earnings’ season has been very gratifying for us and our clients. Almost every company in which we have invested has done what we hoped: made solid profits, in some cases spectacular profits, and has justified our buying decision. This has happened in the context of a still dangerous global pandemic, disrupted supply chains and confused labour markets.

July continued the string of good monthly returns in our portfolios. The combination of continued very low interest rates, reopening of the North American economies and ample governmental support encouraged investors to put money into stocks. The good earnings, noted above, made that very rewarding. All of the North American markets are at, or near record highs, but because earnings have been so strong, most of our portfolio companies are trading at reasonable valuations. The recent announcement by the U.S. Federal Reserve Bank that interest rates will not be rising any time soon bolsters our conviction that the stock market remains the place to be for good returns. Bonds continue to provide stability and safety to portfolios, but sadly, not too much in the way of yield.

We know that many of our clients are concerned about the increases in inflation seen on both sides of the border. Certainly, headline numbers greater than 5% are a great departure from the tame inflation under 2% per year that we have seen for the last five years or so.  Our view is that many of the factors driving up prices are transitory and temporary. Supply chain disruptions caused by the COVID crisis have affected the production of everything from microchips to building lumber. We are already seeing increased shipments of most of the commodities and products that have been in short supply, and prices have started to come down, in some cases very sharply.  We expect that by the end of the year things will be back more or less to normal and the rate of inflation will likely subside to low single digits.

Finally, a word about China and Chinese stocks. As a client, you know that we have never purchased any securities linked to the very large Chinese companies such as Alibaba, TenCent and Didi. It has always been our view that China, a totalitarian Communist dictatorship, is not a suitable place for our client’s money. The lack of respect for shareholders’ rights coupled with an absence of the rule of law as we in North America understand it, made China simply too dangerous for investors. What we have seen in the past few weeks in the Chinese capital markets only strengthens our resolve, and we are happy to say, has not affected any of our client holdings adversely.

We hope you enjoy the rest of the summer,


David Baskin




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