myICLUB Blog

I recently came across an article in an online publication of the Wharton School that discussed the likelihood of recession in the U.S. The report reviewed the common precursors of a recession, such as high inflation, falling home sales, and rising interest rates. It mentioned contributing global factors such as conflict in the Ukraine and Covid uncertainty. The article concluded that the prognosis for the economy and the markets was unclear, and much depended on intervention from the Fed.

Nothing in this commentary sparked any new lines of thought for me. It seemed right in step with most of the analysis I have seen recently about the risk of recession and the impact of an economic slowdown on businesses and their stocks.

It was only then that I realized that this particular commentary was published in May 2022, one year ago. Just how long have investors been worried about the economy, recession, rising interest rates, employment and wages, and inflation? The fact that the S&P 500 entered a bear market in June 2022 seems like a minor footnote to the market narrative, coming as it did in the midst of a continuing stream of economic and market irritations that began with the Covid-19 pandemic. But the conjecturing and posturing of market pundits never ends.

The old saying “can’t see the forest for the trees” is meant to admonish people who can’t see the big picture because they are overly-absorbed in the details.

For bottom-up investors like us, though, the saying should be inverted: “can’t see the trees for the forest.” So many investors are paralyzed by uncertainty about the state of the economy and the macro forces affecting it or the near-term direction of the markets that they miss opportunities presented by individual companies right below their eyes.

When considering companies on their own merits, investors can discover compelling reasons to buy their shares. Many of these companies buck trends and defy conventional wisdom because they are under the guidance of savvy management. These companies succeed when others stall. They focus on building foundations now that will reap increased rewards down the road.

These kinds of companies are ideal for long-term focused stock investors. In the SmallCap Informer, we regularly seek out high-quality companies that have identifiable prospects that will enable them to perform well past the next recession—whenever that may be.

Our timing may occasionally be a little off, but then again there is no investor who is able to time equity purchases to capture the exact start of a bull market or precise end of a recession or immediate beginning of a market uptrend.

Over time, being a little late or a little earlier is not going to cause an investor’s returns to be meaningfully affected. On the other hand, missing out on the best 10, 20, or 30 days of the market in any year will considerably drag down a portfolio’s performance.

No matter how the economy performs, there are always opportunities for investors in individual stocks. The pent-up worry in the markets will dissipate in time, but your portfolio cannot benefit unless you stock up now on high-quality businesses.

In this issue, we discontinue two companies over uncertainty about their quality and potential future results.

Our first focus stock revisits a fundamentally-strong business that is on a strong growth trajectory fueled by communications industry trends. It presents an even better opportunity now at its present valuation than when we introduced the company to subscribers last year.

Our second selection is new to the newsletter, and is showing the benefits of focused management. The business makes and sells just one product line and has earned a leading market share due to management’s focus on quality.

Stay the course!

• DOUG GERLACH

Read Doug's complete commentary and profiles of two recommended small company stocks in the May 2023 issue of the SmallCap Informer stock newsletter. Not a subscriber? Subscribe to the SmallCap Informer and get monthly small company stock recommendations and updated buy/sell prices for each of the 46 high-quality small company stocks currently covered in the newsletter.