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Unrecognized Fundamentals Fly Stronger With...

Unrecognized Fundamentals Fly Stronger With Post-Pandemic Tailwind

Mid Cap Growth Review of the Second Quarter of 2021 | KayneCast 155

July 8, 2021

Chris Armbruster, manager of KAR’s Mid Cap Sustainable Growth portfolio, believes that the low-quality rally of the first quarter of 2021 gave way in the second quarter to a re-recognition of company fundamentals as the most important determiner of stock performance over time.

“In Q2, we saw price increases in businesses that had been centrally growing, in some cases for years, that — due to the stimulus and reopening — experienced a massive tailwind for revenue growth that the market had not accurately accounted for in these companies.”

On the flip side, software companies that were thriving in a world where digital was mission-critical started to show slower revenue growth as business technology spending returned to normal. The slowdowns were, in many cases, not large but were a case of the fundamentals solving in the short term.

The next step is for investors, according to Armbruster, to start looking a little further into the future, beyond the comparisons between 2020 and 2021 to the stories that are going to play out in businesses over the next five years where he believes fundamentals rule. 

Key Contributors and Detractors in Mid Cap Sustainable Growth 

To learn more about the top 5 contributors and detractors in KAR’s Mid Cap Sustainable Growth strategy for Q2 2021 listen to the podcast above.

Next? Inflation Anyone?

Why is inflation a top-of-mind topic for many investors? A couple noteworthy points, since the start of 2020:

  1. The value of M2, which is defined as liquid money like cash, checking, savings deposits, or money market securities, is up 30%. 
  2. The Fed’s balance sheet is up 90%.

With the economy opening rapidly, many companies were caught flat-footed trying to respond to demand. With pandemic-decimated supply chains and raw material production and a post-pandemic labor shortage created by the fiscal stimulants — prices were driven up. 

With time, we expect these conditions to normalize. We don’t know for certain if inflation will be transitory, but we firmly believe our differentiated businesses are well-prepared for it. In our view, businesses with unique products or competitive advantages have the ability to weather short-term inflationary conditions in the form of pricing power as costs rise. These companies can pass along those increases to customers, insulating their own margins and cash flows.

DISCLOSURE

This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.

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