I AM A ...

I accept the Privacy Statement and I agree to comply with it. View our Privacy Statement.

This website uses cookies to better understand user behavior and provide the best experience. By continuing to use this website, you are consenting to the placement and retrieval of cookies on your computer by this website. Cookies will be stored for 90 days.

Never show this.

Bear Market Preparedness: Know What You Own

March 2020

Capricious market declines are unsettling to all of us. In such times, it is paramount to separate market ‘noise’ from business reality.

Allen Bond, Portfolio Manager at Jensen Investment Management Tweet
Headshot of Jensen Managing Director Allen Bond
Allen T. Bond, CFA®
Managing Director,
Head of Research and Portfolio Manager

That was fast. After peaking at 3,386 on February 19, 2020, the S&P 500 Index declined by 26.7% in just sixteen trading days to officially start a bear market. This marks the sharpest descent into bear territory in history.1 The selling of stocks in this period has often felt indiscriminate as market participants struggle to discount the economic impact of the COVID-19 pandemic in a near-vacuum of information. Reactionary investment decisions are not typically rewarded in such a market environment.

Rather, in times of market stress, it is crucial to ‘know what you own’ and focus on underlying, long-term business attributes. For Jensen, these factors include competitive advantages, balance sheet strength, and free cash flow consistency. Using this framework, we can compare stock price reactions with our existing knowledge of each individual business to identify market over- and under-reactions.

Table 1
Table displaying absolute share price changes of stocks from 2/19/20 to 3/12/20

Source: Jensen Investment Management

Table 1 displays absolute share prices changes for the top-three and bottom-three decliners among the stocks held in the Jensen Quality Growth Strategy during the aforementioned period. As shown, all the portfolio stocks declined in the period, within a range of -6.1% to -35.7%.

Judging magnitude in such a short time period is challenging, but for both the largest and smallest decliners the market reaction appears to be directionally consistent with prospects for near-term business fundamentals. Emerson, United Technologies, and V.F. Corp serve cyclical end markets and are therefore financially sensitive to economic changes. On the other hand, Johnson & Johnson, Becton Dickinson, and General Mills cater to relatively inelastic customer demand. And, both Johnson & Johnson and Becton Dickinson stand to benefit from increased use of the global healthcare system.

Explore the Jensen Quality Strategies

However, there are examples in the portfolio where the market reaction appears disproportionately negative relative to the fundamental outlook. Two such examples are Accenture and Stryker Corporation, as shares of both companies declined more than the market during this period. Yet, we view both businesses as resilient and well-positioned relative to expected economic headwinds.

Table displaying percent decline of stock prices for Accenture and Stryker from 2/19/20-3/12/20

Source: Jensen Investment Management

Accenture (ACN)  is the world’s largest business and information technology consulting firm, serving clients in approximately 120 countries throughout the world including 75% of Global 500 companies. The company sports a nearly debt-free balance sheet, and its global scale allows for the unique combination of strategic advice and execution expertise when crafting and implementing business productivity projects. These projects tend to be long-term in nature and cannot be quickly shuttered based on near-term economic speed bumps. As a result, we expect to see some business slowdowns but not the financial disruption that appears to be reflected in its recent share price decline.

Stryker (SYK)  is a global leader in orthopedic implants, surgical tools, and hospital equipment, serving primarily hospitals and other healthcare delivery organizations. It benefits from longstanding product development and commercial relationships with these clients. Stryker also benefits from revenue diversity, both at the product and geographic level. We expect to there will be pockets of short-term challenges across its product portfolio, as some orthopedic procedures can be delayed. However, Stryker products support many non-discretionary procedures, and it is a global leader in the sale of hospital beds, a business that stands to benefit from higher hospital admissions.

Capricious market declines are unsettling to all of us. In such times, it is paramount to separate market ‘noise’ from business reality. We take comfort managing a portfolio of time-tested businesses backed by competitive advantages and financial resiliency. As investors, our job is to weigh long-term business strength relative to market expectations. During this short time period, we have been in the fortunate position to add to many of the fund holdings – including Accenture and Stryker – at what we consider deeply discounted prices.

1 https://www.ft.com/content/d895a54c-64a4-11ea-a6cd-df28cc3c6a68

Holdings and attribution discussed are those of a representative account (also “portfolio”) of the Jensen Quality Growth Equity Composite. The mention of specific securities illustrates the application of our overall investment approach only and is not to be considered a recommendation to purchase or sell a security. The specific securities identified and described herein do not represent all of the securities purchased and sold for the portfolio, and it should not be assumed that the investment in these securities will be profitable in the future. There is no assurance that the securities purchased remain in the portfolio or that securities sold have not been repurchased. Individual account characteristics and performance returns may differ from those of the representative account due to the size of the portfolio, client-specific constraints, tax considerations or other factors.

The contribution to performance of the Portfolio’s Top Contributors and Bottom Contributors was calculated by multiplying the security’s weight in the portfolio by the rate of return. If you wish to obtain a list showing the contribution of each holding in the representative portfolio or additional information about the calculation methodology, please contact Jensen Investment Management, Inc. at [email protected]

Indices are unmanaged and do not incur investment management fees. An investor is unable to invest in an index. Past performance is no guarantee of future results. Performance results shown reflect the reinvestment of dividends and other earnings. 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.

The information contained herein represents management’s current expectations of how the Jensen Quality Growth Equity 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 the stated investment objectives, guidelines and conclusions stated herein.

Although taken from reliable sources, Jensen cannot guarantee the accuracy of the information received from third parties. Graphs, charts, and/or diagrams cannot, by themselves, be used to make investment decisions.

Interested in Learning More?

Related Insights

Jensen News & Insights

13 June 2022
Press Release: Shannon Contreras Appointed to Board of Directors
We are pleased to announce the appointment of Shannon Contreras, Managing Director – Finance, to Jensen's Board of Directors.
15 March 2022
Do Not Be Fooled by Earnings Adjustments
The magnitude of income statement differences between GAAP and non-GAAP figures can be substantial, and investors are largely on their own to determine the veracity and impact of the differences. In this article, Portfolio Manager Allen Bond discusses how to interpret them and what factors to focus on.
14 January 2022
Why Invest in Quality?
Quality is one of those words that appears to represent a simple truth—it seems self-evident that high quality is always preferable to low quality, no matter the subject at hand. Everyone wants quality, especially at a good price. But what is quality when it comes to investing?
30 June 2021
Press Release: Kevin Walkush appointed Head of ESG
We are pleased to announce that Kevin Walkush, Portfolio Manager, has been promoted as Head of Environmental, Social and Governance (ESG) initiatives at Jensen Investment Management.
3 June 2021
Inflation Resilience
Interest rates are rising in unison with inflation expectations. The resultant pressure on stock prices is twofold, one direct and one more subtle.
17 March 2021
Press Release: Quality Value Team Promotions
We are pleased to announce that Tyra Pratt, CFA, and Jorge Rivas, CFA, have been promoted to Portfolio Managers on the Jensen Quality Value Investment Team.
5 March 2021
Quality Investing Headwinds
Our analysis suggests that high-quality stocks are caught between momentum growth sentiment on one side and a wave of government stimulus benefiting low-quality businesses on the other.
17 December 2020
Jensen's Client Service & Partnership
Richard Clark discusses Jensen's long-standing approach to quality client service and partnerships.
16 December 2020
Carbon in the Quality Value Strategy
A look at portfolio companies in Jensen's Quality Value Strategy that play a prominent role in reducing or minimizing the amount of energy required to run their businesses.