Financial media headlines are dominated with prognostications about the future, few of which tend to be based in fact, and many of which end up being wrong. A sample of recent headlines shows: “A recession is coming — and stock markets won’t come through it unscathed, strategist says;” “Veteran investor David Roche says a credit crunch is coming for ‘small-town America’;” “Sliding Diesel Prices Signal Warning for U.S. Economy;” and “Economists Turn More Pessimistic on Inflation.” At MIAM, we don’t attempt to predict the future state of the global or national economies with such broad brush strokes. Instead, we view each company’s prospects of generating earnings independently with the effects of a drop in consumer purchasing power, a change in interest rates, or operational challenges considered in light of its impact on the business.
Despite the headlines listed above, sections of economic data tell a different story, and our research team’s recent conversations with management of portfolio companies give a differentiated view. Last week, we spoke to the Chief Customer Officer of Fluent, Inc. (FLNT) who remarked that consumer brands that his company has spoken to expect to spend more on digital marketing in the second half of 2023. This first-hand data about a specific industry runs afoul of the market-wide narrative many members of the media have woven in reaction to falling inflation and reports of slowing growth in the US, European, and Chinese economies.
Similarly, we have spoken to food manufacturing businesses Kraft Heinz Co. (KHC) and Treehouse Foods, Inc. (THS) who recently completed price increases to their customers while subsequently realizing the benefit of year-over-year declines in the price of key inputs into their products. We’ve seen a similar pricing dynamic across many manufacturers including Core Molding Technologies, Inc. (CMT) where prices were increased during a period of high manufacturing costs and the company’s pricing power allowed it to keep prices stable even as costs came down. The last time we spoke with Core Molding’s management they stated that the company has completed re-setting prices with almost all of its customers and that prices of the materials used to produce its long-fiber plastics, while volatile, are expected to subside over the coming quarters.
The price-hike cycle is only one area where company management has given us a different opinion than mainstream media. In our conversations with the management teams of both 2020 Bulkers Ltd. (2020-OSL) and Himalaya Shipping Ltd. (HSHP) we have heard that demand for the products shipped in dry bulk vessels is improving incrementally and that the long-term undersupply of vessels still exists. While this is not news to us, management is able to give us an accurate real-time opinion on the global dry bulk market that lagging indicators like Bureau of Labor Statistics (BLS) or Energy Information Administration (EIA) data may obscure or delay our evaluation of the market.
Finally, company management can often give us an unbiased critique of their industry at large, their suppliers, and their competitors. In our portfolio, this exists today with Hooker Furnishings Corp. (HOFT) and Flexsteel Industries, Inc. (FLXS) who compete in the home and office furnishings industry. The two companies have taken different paths when it comes to selling through club (wholesale) stores with Flexsteel entering the space and Hooker exiting. Each management team has supported its decision with facts and strategy, and we’ve asked each to also weigh in on its competitor’s decision, which gives us a unique insight into both strategies and how well it may be suited to that company’s overall strategy and operations.
We are acutely aware that it is part of every management team’s job description to speak positively about its own company and tout the highlights of its company while minimizing the potential risks. That said, we have constructive working relationship with the management teams of our portfolio companies, and are always appreciative of their time and willingness to speak with us (often at length and with great detail about the company and its financial statements). As equity shareholders, we take it upon ourselves to represent our clients’ ownership interests in each company and hold management and the board of directors accountable to shareholders’ interests. As bond holders, we enforce the contractual terms of the bonds and ensure that the company prudently allocates capital throughout business cycles such that the interest and principal payments are made on time and in full. Our discussions with company management remain a valuable tool in our research process and one that differentiates our process from many of our peers.
In this market environment, as with all environments, we remain calm, alert, and opportunistic. As always, feel free to reach out to MIAM if you would like to learn more or discuss a particular company or idea.
The MIAM Research Team
This document is published by Milwaukee Institutional Asset Management (MIAM), a division of Global Value Investment Corp. (GVIC). MIAM is the institutional investment advisory division of Global Value Investment Corp., providing investment advisory services to institutional investors including Registered Investment Advisors and Broker-Dealers. All statements or opinions contained herein are solely the responsibility of Milwaukee Institutional Asset Management. The material, information and facts contained in this report were based on publicly available information about the featured company and were obtained from sources believed to be reliable but are in no way guaranteed to be complete or accurate. This report is for informational purposes only and should not be used as a complete analysis of any company, industry or security discussed within the report. This report does not constitute an offer or solicitation to buy or sell any security, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. An investment in any security referenced in this report may involve risks and uncertainties that could cause actual results to differ from the analysis provided herein, which may not be suitable for all investors. Past performance should not be taken as an indication or guarantee of future results. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. Employees of GVIC may have positions in securities referenced in this report. ‘Intrinsic’ or ‘Appraised’ value refers to MIAM’s quantitative and qualitative assessment of the value of an enterprise. Market capitalization is a measure of the total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current quoted share price. MIAM’s investment strategies generally invest in a smaller number of securities than some other strategies. The performance of these holdings may increase the variability of a strategy’s return. There is no assurance that dividend-paying stocks will reduce price variability. Value investments are subject to the risk that their intrinsic value may not be reflected in market prices. For purposes of distribution in the United States, this report is prepared for persons who can be defined as “Institutional Investors” under U.S. securities regulations. Any U.S. person receiving this report and wishing to affect a transaction in any security discussed herein must do so through a U.S. registered Broker-Dealer. Neither Global Value Investment Corp. nor Milwaukee Institutional Asset Management is a registered Broker-Dealer.
An investor should consider a strategy’s investment objectives, risks, charges and expenses carefully before investing. This and other important information can be found in the Firm’s SEC form ADV Part II. To obtain a copy of GVIC’s ADV Part II, call 262-478-0640 or visit www.gvi-corp.com. Please read the ADV carefully before investing.
Additional information is available upon request.
No part of this document may be reproduced in any form without the express written consent of GVIC. Copyright 2023. All rights reserved.