Beyond Fundamentals: Seeing the Bigger Picture

How we seek to avoid the trap of short-term distractions in pursuit of durable, sustainable growth opportunities

Video Transcript

It’s impossible to know whether the market has bottomed yet. And it is dangerous to look at what may have been working as the market has bounced. For what might be successful in the future, often times, when you get these bear market bounces, it’s the lowest quality companies that outperform. And that performance is often short-lived.

The Analyst Lens on Company Behavior (0:38)

One of the things that I think we need to be careful of as we’re investigating whether a company is profitable or whether it’s generating cash flow is the investments that they’re making for the future. What we’re seeing more often, in small companies, and in many large companies, too, is that companies are making smart above the line decisions to invest in their future. They may be hiring people, investing in software; they may be investing heavily in sales and marketing. And sometimes those are smart decisions that are going to help propel them forward.

It’s important to us as analysts to understand this behavior and to be able to identify where it’s happening. Do you see it on the income statement? Does it show up on the cash flow statement? Increasingly, with companies that are more digitally oriented, you see it on the income statement; it happens above the line. And it’s not always bad behavior. When you look to the unit economics of these companies, what you see are that many of the companies actually have very viable business models, and they can turn on profitability whenever they want. But instead, they’re making a discretionary decision to invest in their future.

And so we need to be careful of what bucket we put some of those companies into and scrutinize the investments that they’re making. But be open-minded to the fact that some of them may be smart investments, even if they sacrifice cash flow and earnings today.

Investing Through Market Cycles (2:32)

One of the things that I have observed over my career is that it’s often during times like this that investors get very short-term focused. And it’s an advantage if you can stay long-term focused, which is exactly what we’re doing at Polen Capital. Instead of trying to win for the next three months, or six months or one year, we’re really looking out over the next five to ten years to identify what are the best companies that we can own that are going to be able to deliver sustainable results well into the future.

It’s easy to get distracted by shorter-term macro factors and to lose sight of the big picture. And many investors fall into that trap. That’s exactly why we see investors buying on the highs selling on the lows. Instead of falling victim to those shorter-term behaviors, we believe it’s essential to stay focused on the long term.

It’s easy to get distracted by shorter-term macro factors & to lose sight of the big picture.

—Rayna Lesser Hannaway, CFA
Head of Team, Portfolio Manager & Analyst, Small Company Growth

Important Disclosures
This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of September 2022 and may involve a number of assumptions and estimates which are not guaranteed, and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.

Past performance does not guarantee future results and profitable results cannot be guaranteed.