Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about what makes for a strong company with David Atkins, portfolio manager with Value Partners Investments. We talked about durable competitive advantages, what he looks for in a management team, and current valuations. And we started by asking how he distinguishes between essential businesses and merely popular ones.
David Atkins (DA): When we’re looking to invest in a business, we’re looking for those businesses that are difficult to live without, difficult to compete with, difficult to replicate. Think of a bank. These are businesses that people use each and every day, meaningful businesses that have been around for 100 years and will likely be around for another 100. When you’re trying to create wealth for people over the long term, those are the types of business characteristics we’re looking for, not those faddish businesses. People get confused sometimes with the product versus the business. They like the product so they think the stock should be good. It doesn’t always work out that way. We try to avoid those fads and focus on real businesses with strong financial capacity to succeed. That’s, in essence, what we’re trying to focus on.
What constitutes a durable advantage
DA: When you’re looking for those really good businesses, I always think of ones with higher margins [and] good revenue growth. Those characteristics are ones that you want to focus on because high margin means they’re onto something. People are willing to pay for it. You can be a value investor, but if a business isn’t growing, you’re going to get what you pay for. So, you need growth, and you need margins. You need that profitability.
Identifying disruption vulnerability
DA: I’m not going to speculate with client capital. I don’t want to try and guess which way things are going to go. Think of the AI trend, and how is that disrupting or causing opportunities for businesses? If you look at software companies today, they’re very out of favour in the market. It’s uncertain because we’re not sure where it’s going to go. But if you own a business that can benefit from the use of AI, that could be advantageous in an environment where the market is really nervous. In Canada we definitely have concentrated sectors. Telecoms. Even energy, in a way. They’re having to work with regulators. We’re fortunate to have an environment in Canada where the regulators haven’t really prohibited them from growing and running their businesses the way they should. You just have to be really conscious of what those limitations might be. And if you can still find a business that’s able to weather through that environment, it’s going to be a good investment opportunity. That’s always the thing with disruptions. You’re not necessarily always going to see them or predict them. That’s why if you focus on a durable business, they’re going to be able to weather through those storms that you necessarily can’t foresee.
Assessing management teams
DA: We’re looking for those teams that are aligned with shareholders, ones that are focusing on the business over the long term and looking to grow that business and do it in a reasonable way without taking excessive risks. We want those management teams to return capital to shareholders now. through dividends and growing dividends. You look at a business like Salesforce, right now, that’s doing a $25 billion share buyback. That’s meaningful. And they’re doing it at a time which I think is very opportunistic. That’s a management board decision that I can really stand behind, that I really believe is going to be a good opportunity for shareholders over the long term. Just trying to find those management teams that are aligned with shareholders is very meaningful for us.
How he views valuation
DA: We are operating in an environment where it feels like investors have put valuation concerns on a lower priority. They’re investing in businesses that they like. They’re investing through themes that are positive and momentum based. I’m a value investor at heart. And I know that I’m paying more for businesses these days than I would have 15 years ago. I’m willing to pay more today if their growth can justify it. We own Alphabet, for example, which is trading at valuations that I probably wouldn’t have paid 15 years ago. But that business is growing remarkably fast still. It’s in a dominant position. So, if you look down the road, I’m not paying too much for it if that business can grow the way I expect it to over the next five years. As long as those businesses are meeting those projections, I think we will do very well.
And finally, what’s the bottom line on finding solid companies to invest in?
DA: It’s so important to focus on the best businesses at reasonable prices, and that’s really how you’re going to create wealth for clients over the long term. I would say that in the environment we’re in, with all of the geopolitical concerns, with all of the quickly changing trends in technology, this environment has been a very difficult environment to invest in. But I’ve always believed that if you have a really good investment strategy where it’s focused on the businesses and business growth, and you’re paying a reasonable price for it, that overall arching strategy is going to allow you to invest through the noise, through all this chaos. Sticking to that strategy is so important. And then if you do that, you really can find opportunities.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to David Atkins of Value Partners Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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