Against the Tide:
How Rigorous Independent Research Led a Jensen Analyst to Pandemic-Hardy Stocks
When he was in high school, Jeff Wilson’s grandfather gave him a small amount of money to try his hand at investing. He wanted the youngster to learn about stock analysis and experience the ups and downs of the market. As an incentive, he promised to backstop any losses.
Other teenagers might have been drawn to the stocks of sports apparel or gaming companies, but Wilson settled on a real estate investment trust because it had stable cash flows tied to ground leases. Thankfully, Wilson’s grandfather didn’t need to backstop any losses, since the investment proved successful. That win gave Wilson a taste of investing that drove him through college and into his career.
Jeff Wilson, CFA®
Today, as an analyst on the Jensen Global Quality Growth Strategy, that passion for investing still drives his belief in the importance of deep research, patience, and fierce independence.
“I really admire good businesses, and that’s what appealed to me about Jensen,” says Wilson. “I love doing deep due diligence and trying to find businesses that compound over time.”
Nerves of steel
Investing isn’t for the faint of heart. But Wilson couldn’t have imagined the extraordinary circumstances he’d face when he was hired in 2019 as part of the team that would launch the Jensen Global Quality Growth Strategy, an international sibling to the flagship Quality Growth Strategy, which launched in 1992.
As the team was building out its investments, the COVID-19 pandemic was starting to spread in Asia. With the launch just weeks ahead, most of the world began shutting down and stock markets went into free fall. Still, Wilson and his colleagues forged ahead, guided by their thorough research, conviction, and a different way of seeing the world.
“To be a good investor, you have to be unemotional in your approach,” Wilson says. “You also have to be a bit of an optimist and believe that things will be better in the future, which isn’t easy when sentiment in the market quickly swings toward fear.”
Going where others fear
One of the first casualties of the pandemic was travel. While flights were grounded in the spring of 2020, Wilson researched Madrid-based Amadeus IT Group (AMS), a back-end technology provider that some of the world’s largest airlines rely on to sell tickets and power their websites. Since the company is paid mainly on a per-passenger basis, revenues plummeted when global travel halted due to widespread lockdowns. Wilson and the team, however, looked past the immediate shutdowns.
“We knew that if and when travel rebounded, their position would be unassailable due to the mission-critical services Amadeus provides its customers,” Wilson says.
While the team liked Amadeus, they weren’t ready to dive in just yet. They took a wait-and-see approach to understand Amadeus’s plan to emerge from the downturn.
“We added it once they stabilized their business and became free cash flow positive at volumes that were substantially below pre-pandemic levels,” he said. That meant that any rebound would be a boost for both revenues and free cash flow, providing Jensen with an attractive entry point to a high-quality business that was navigating through short-term uncertainty.
Amadeus stock suffered a steep decline through that spring and summer, until rebounding later in 2020. The stock has proven resilient during the stock market selloff year-to-date 2022 through May, outperforming the MSCI ACWI index by nearly 10 percentage points.
Another example is UK–based Compass Group (CPG), the largest global food service provider for third parties such as hospitals, schools, corporate offices, and sports arenas. Wilson estimates that Compass Group lost 40% of its sales volume in those early pandemic days, with schools and offices closed and sporting events canceled.
“How do you pivot when 40% of your volume goes away overnight?” Wilson wondered.
Deep fundamental research contributed to Wilson’s confidence that Compass could navigate that difficult time, because it had done so before. “Having studied Compass, we saw how the company performed during the last recession, with their pristine balance sheet and diversified customer base allowing them to play offense while peers suffered and retrenched,” he says.
“With 60% of their revenues operational during the pandemic, Compass had a base from which they could rebound,” Wilson says, “unlike many smaller and less diversified peers.”
Rebound indeed: As of early 2022, Compass has surpassed its 2019 sales volume with record new business wins and client retention rates exceeding 95%. The stock is up 7.7% in 2022 through May 31, outperforming the MSCI ACWI index by nearly 20 percentage points.
Independence grounded in research
Jensen is able to make contrarian calls because of the months—sometimes years—the investment team spends researching their stocks. After this much time, there’s little that’s unknown to the portfolio managers and analysts. Therefore, they can act quickly when market conditions change and opportunities present themselves.
The process starts by eliminating stocks with market caps under $1 billion. Then, the Jensen team applies its trademark quality lens by screening for those companies that have returns on equity of at least 15% for each of the last 10 years, as determined by Jensen’s management, not company reporting. That reduces the investable universe to nearly 900 names. After that comes another cut to bring the bench candidates down to 50–70 stocks.
Portfolio managers and analysts then divide up the names for in-depth analysis. From there, each team member produces a 20- to 50-page research report of their findings. Next, the team meets to discuss the names to decide whether to include them. These meetings can be grueling, with colleagues acting as devil’s advocates to make sure they’ve considered every potential downside that could plague a stock. The team must achieve consensus in order to include a name.
No matter which name he’s looking at, Wilson has his eye out for stocks with competitive advantages that may have the attributes to succeed irrespective of the economic climate. That’s especially true now, given the enormous inflationary pressures that companies are navigating.
“I like businesses with clear value propositions and durable competitive advantages that have stood the test of time,” he says.
And that’s why Jensen’s own durable business model, coupled with fierce independence, is thriving today.
The company discussion in this article is solely intended to illustrate the application of our investment approach and is not to be considered a recommendation by Jensen. The specific security identified is taken from a representative account of the Jensen Global Quality Growth Strategy and does not represent all of the securities purchased and sold for the Strategy. Our views expressed herein are subject to change and should not be construed as a recommendation or offer to buy or sell any security and are not designed or intended as a basis or determination for making any investment decision for any security. Our discussions should not be construed as an indication that an investment in a security has been or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of any security discussed herein.
The information contained herein represents management’s current expectation of how the Jensen Global Quality Growth Strategy will continue to be operated in the near term; however, management’s plans and policies in this respect may change in the future. In particular, (i) policies and approaches to portfolio monitoring, risk management, and asset allocation may change in the future without notice and (ii) economic, market and other conditions could cause the Strategy and accounts invested in the Strategy to deviate from stated investment objectives, guidelines, and conclusions stated herein.
Certain information contained in this material represents or is based upon forward looking statements, which can be identified by the use of terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of a client account may differ materially from those reflected or contemplated in such forward-looking statements.
This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. Jensen Investment Management, Inc., is an investment adviser registered under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Although taken from reliable sources, Jensen cannot guarantee the accuracy of the information received from third parties.
© 2022 Jensen Investment Management. The Jensen Quality Universe is a trademark of Jensen Investment Management. All rights reserved.
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