In this last installment of our three-part series, we cover mistake No. 3: focusing on the stock, not the company.
In part two of the series, we explored attempting to time the market. Part one, centered on how metrics like return on equity (ROE) and return on invested capital (ROIC) can be key to long-term investing.
Focusing on the stock, not the company
Stock price can often overshadow a company’s long-term potential. Some investors may focus on short-term stock fluctuations and speculative gains, but stock prices are dynamic and influenced by various factors like market sentiment, news and earnings reports. These short-term fluctuations do not always reflect the actual quality or health of the company, its ability to generate consistent free cash flow or the strength of its management team.
We believe that looking beyond the stock price and focusing on companies with enduring competitive advantages is crucial for long-term investors. When evaluating a company we assess its market position, unique offerings and potential for long-term growth. Identifying companies that can withstand the test of time is the first step in our investment process.
Netflix, for example, has boasted short periods of strong stock performance;1 however, with the growing number of streaming services now available its long-term competitive advantage remains uncertain. On the other hand, Broadridge, a stock we own, is currently a leading player in investor communications and trade processing solutions, and enjoys a near-monopoly position in its market. Broadridge has shown consistent growth and strong ROE, making it an attractive long-term investment for us.
A deep understanding of the underlying business model is also crucial. A well-aligned governance structure that evaluates performance and aligns incentives may insulate a company from negative surprises and ensure sustained performance. And the way a company allocates capital can show us how it intends to deploy its financial assets and other resources to maximize profits.
For a more in-depth discussion of our quality strategy and examples of our emphasis on long-term investments rather than short-term market darlings, please visit our post, Three Mistakes to Avoid as a Long-Term Investor: Observations from 35 Years Managing Money.
1 Netflix stock rose 39% from 3/2/20 – 8/31/20 and 38% from 6/1/21 – 10/29/21, https://seekingalpha.com/symbol/NFLX/historical-price-quotes.
The company discussions in this article are solely intended to illustrate the application of our investment approach and is not to be considered a recommendation by Jensen. 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.
Past performance is no guarantee of future results. 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, expectations or results may differ materially from those reflected or contemplated in such forward-looking statements.
The prices of growth stocks may be sensitive to changes in current or expected earnings, or may experience larger price swings.
The information contained herein illustrates a facet of management’s investment process; however, management’s plans and policies in this respect may change in the future. In particular, economic, market and other conditions could cause the process to change from the descriptions contained herein. 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. Graphs, charts and/or diagrams cannot, by themselves, be used to make investment decisions.
© 2023 Jensen Investment Management
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