Analyst, Global Equities

Patience is a wise investment, you could say. As we inch toward the end of 2023, we wanted to reflect on a few companies whose fortunes have changed significantly since last year, when several factors ranging from supply chain issues to a slow recovery from COVID were causing headaches. Here are a few such cases that not only turned the corner, but also showcase our approach based on fundamental company analysis and long-term investing.

Take Adidas, the renowned sportswear designer. Throughout 2022, the company found itself facing headwinds, prompting it to cut its guidance four times. These challenges involved supply chain issues, the war in Ukraine, China’s zero-Covid policy, intensifying competition from Chinese brands, inventory pile-up, and the termination of its partnership with Kanye West and his Yeezy brand. Consequently, the company’s stock closed the year with a significant decline of 48%.

Spearheading a Change

However, the company announced in November 2022 that Bjørn Gulden would be assuming the role of CEO, succeeding Kasper Rørsted. For close to nine years, Gulden had led Puma, Adidas’ eternal rival as both companies were founded by the competing German Dassler brothers in the 1940s. Bjorn Gulden orchestrated a transformation at Puma, which was struggling with an aging product base. Hopes that he would do the same at Adidas lifted the stock: since the beginning of 2023, it is up over 31% as at September 30 and has almost doubled since its November 2022 lows. Within our International Equity Pooled Fund, it is the third-best performer in absolute terms year-to-date, quite a reversal after posting one of the weakest 2022 performances. We added to our position a few times during its downturn, confident that Adidas’ enduring fundamentals remained intact and that short-term hurdles would be eclipsed by long-term growth perspective.

Another turnaround story involves Grifols, the Spanish plasma therapeutics company, dedicated to developing products and services to treat illnesses such as hemophilia and immune deficiencies. The company faced a setback during the pandemic and its rolling lockdowns, as it relies on donors physically going to their clinics to donate plasma. The stock lost 36% of its value last year and started 2023 on a challenging trajectory, dropping another 20% by March.

Assessing Worries

In response, we worked to assess if our investment thesis for Grifols still held, keen to see if the impacts from the pandemic would be more structural than we thought at first. We built a scenario analysis around potential disposals, cash flow generation, and debt levels, which were all concerns for sell side analysts. While these headwinds put downward pressure on the stock, our conclusion was that the worries were overdone and that the company was still in a good position to continue its growth trajectory and recovery. Since then, the management has made a few announcements that were positively received and the stock bounced back nicely. As at September 30, it is up close to 46% since its March 2023 lows. Once again, we increased our position on a few occasions, taking advantage of valuation opportunities.

Other reversals of fortune in our portfolio include SAP, a German business technology provider, Fresenius, a European healthcare conglomerate, and CCH, the world’s third-largest Coca-Cola bottler.

Our investment process is built around the philosophy that sustainable and repeatable earnings growth creates value over time. Thus, these stock examples underscore our commitment to ensure the resilience of our investment thesis when downward pressure affects a stock. If indeed our thesis does hold, we have the confidence to add to our positions as we seek to create long-term value for our clients. Stock price declines are not necessarily a reflection of an incorrect thesis. A thesis may take more time than initially expected to materialize, hence affecting the stock price and demonstrating that markets can sometimes suffer from short-term myopia and fail to see the long-term potential of an investment. However, there are occasions when patience does not yield positive results. It is then crucial for investors to glean insights from their errors.

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