Large Cap Commentary – January 2015
The new year is officially in full swing. At Argent, we are in the midst of earnings season, where companies report fourth quarter results and provide guidance for the year to come. One of the most noteable topics as we listen to these reports is currency. As shown in the chart below, the dollar has recently strengthened considerably relative to other world currencies. For us consumers, this change is not all bad. We can purchase imports at lower costs and we can visit exotic locales more cheaply. A strong dollar also puts downward pressure on oil prices and consequently, we pay less at the pump. Needless to say, consumers are enthused. Businesses, well, they are a different story. The strong dollar creates an especially interesting situation for those large cap companies in which we invest.
Businesses translate their offshore sales and earnings into dollars. When the dollar appreciates as much as it has, this translation can have a material negative impact on a company’s reported results. Many businesses have a natural hedge in a local currency that is being devalued because their costs are also in the form of local currency. While sales may be depressed, expenses are as well.
At Argent, we tend to focus on finding organic, foreign currency (or fx) neutral results. Basically, with fx neutral results, companies cannot affect the currencies in which they do business but can affect their own sales, expenses and profits. This is where we focus. We have specific goals in mind for the companies we hold within our portfolio as well as for the companies we are researching as potential investment ideas. In the end, we assess companies on their ability to implement fundamental and sustainable changes which we believe will positively impact future results.
Headline results during such environments, where currency fluctuations are in flux, can often be misleading. A headline may read, “miss on sales” or “earnings light”, when the reality is that currency translation may explain the discrepancy. As with every earnings season, we will pull out our magnifying glass in order to identify the true and repeatable results for the companies we follow in order to determine whether or not they continue to meet our disciplined, in this case, currency-flexible investment process.
As always, we appreciate your interest in Argent Capital Management.
Ken Crawford , Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. Past performance is no guarantee of future results.