It pays to focus on good quality, long-term growth stocks in a market like this one, says Wil Wutherich, president of Montreal-based small-and medium- cap fund manager Wutherich & Co.
May proved to be a weak month for equity markets, plagued by the eurozone debt crisis and weak US economic growth. Major market indices like the S&P 500 was down 6%, the Dow Jones Industrial Average was off 5.8%, the Nasdaq fell 7.2%, the S&P/TSX Composite retreated 6.1% while the BMO Small Cap Index was down 7.4%.
But Wutherich & Co's Composite was down a mere 1.3% during the month.
Wutherich, which has spent nineteen years as an equity analyst and portfolio manager, says he is looking for stocks with the "right growth at the right price".
For a year's time frame as of the end of May, Wutherich's Composite is up 9.2% versus off 14.2% for the S&P/TSX Composite.
The Wutherich & Co Composite is also up more than 15% compounded since its inception in 2001.
The firm, which invests on behalf of mutual funds and high net worth individuals, has seen its picks benefit investors in the current market, where cyclical stocks such as mining and materials-focused companies have gone out of favour.
Ratings and stock index maker Standard & Poor's recently unveiled changes to its range of Canadian stock indices, revealing a shift from cyclical stocks into defensives for its main index.
Wutherich's portfolio of companies is weighted nearly 72% toward Canadian stocks, more than 18% toward US stocks, with almost 10% invested in cash.
Of the Canadian stocks, the bulk of funds are invested in the industrials sector, followed by energy with investments in drilling services companies and suppliers to the resource market, and then by the consumer and healthcare sectors.
Wutherich says there is little to no financials exposure.
In a recent monthly newsletter, the firm, which counts Steadyhand as its mutual fund partner, said that with perhaps only one or two exceptions, all of the companies in its portfolio are in "excellent condition".
"They continue to experience good demand for their products and services and are generating excellent financial metrics.
"Though we won't avoid the effects of a global economic slow-down, we do think that most of our companies are well equipped to survive and even thrive in this environment."
In its latest quarter, the company, which sells athletic equipment, footwear and apparel, reported an over 23% increase in profit, and increased its full year outlook.
Net income for the first quarter that ended April 28 rose 23.5% to $26.4 million, or 98 cents per share, while sales grew 14.4% to $232.9 million. Comparable store sales, a key metric used to assess a retailer’s financial health, increased 11.1%.
The company now expects earnings between $2.50 to $2.65 per diluted share for the year, sharply higher than the $2.35 to $2.55 per share expected previously.
Another company in its portfolio is Canada's largest drug store chain, Shoppers Drug Mart (TSE:SC), which despite grappling with generic drug reforms in many Canadian provinces, managed to post earnings and sales growth in the first quarter.
Even with the impact of the regulatory changes, prescription sales were up 2.9% in the latest quarter while front-of-store sales rose 2.5%.
"When the headlines seem all bad, as they do now about Europe and the global economy, we go back and look at the fundamentals of the companies that we invest in," says Wutherich.
The firm's focus is on established companies that have a proven track record in revenue, cash flow or earnings per share growth, with strong managements and solid balance sheets.
"Free cash flow growth is the most important. It's all about going back to the fundamentals and looking at balance sheets," Wutherich's president affirms.
"We're seeing pretty good companies getting shot down right now, so we would eventually like to see our cash proportion of our portfolio go down."
The firm's mandate is emphasized on small to medium cap companies, defined roughly as between $50 million to $5 billion in market cap. Its portfolio's weighted average in terms of market cap is $1.3 billion, which Wutherich says is somewhat skewed because of Shoppers Drug Market.
Removing this company, the weighted average would be between $700 to $800 million, adding that Wutherich & Co does not shy away from large cap companies provided they have the right growth characteristics relative to their current price.
Wutherich & Co, which takes 1.5% annual management fees, prides itself on a concentrated portfolio, with a minimum of 15 and a maximum of 30 equities at any one time.
According to its own data, if one would have invested $100,000 with the firm as at September 2001, this would be worth roughly $450,000 now. No small feat.