We believe corporate fundamentals ultimately drive market performance. Companies, of course, operate within the broader economic environment of the U.S. and the global marketplace. While corporate America continues to “outperform” the broader economy, the slowing economy and uncertainty among consumers and businesses regarding the economy are having a negative influence. In the past year, we saw a continuation of challenges to revenue growth across many industries. Economic concerns caused consumers and businesses to act in a predictable fashion: Individuals became apprehensive about spending and businesses became cautious over hiring employees and making capital outlays. Corporate revenues reflect that trend—on a year-over-year basis, according to J.P. Morgan. Unlike quarterly earnings and revenues during the post- 2008 Financial Crisis recession, more recent results reflect stronger economic conditions. As a result, corporations now have harder benchmarks to beat when evaluating results on a year-over-year basis. Moderating GDP growth is also expected to make it harder for corporations to generate substantial revenue and earnings growth.
This backdrop of a slow growth economy, however, is one in which our investment philosophy is equipped to thrive. Our fundamental investment strategy keeps us focused on finding compelling investment opportunities among companies that are best suited to excel in these challenging times of slow economic growth and increasing concerns over fiscal policy. By conducting in-depth research, we encourage students to find companies that can grow earnings and revenues by gaining market share. Furthermore, we are also attuned to the investment opportunities that challenging economies offer to companies capitalizing on innovation and change.
Certain sectors to be focused
the past, we heavy weighted in tech and pharmaceutical companies. Looking forward, a couple of sectors come to our attention. First, Consumer Discretionary, we research an overview of typical earnings reports for the recent period. Warnaco Group, Coach Inc., and Starbucks Corporation were among companies that announced softness in customer spending. Warnaco has brands such as Speedo and Calvin Klein and it reported weak second-quarter results for Europe and the U.S. Even with positive performance in Asia and Latin America, its net revenues declined 5% on a year-over-year basis, which was in line with Warnaco’s expectations. Warnaco management warned that it is balancing its expectations for new product launches with its outlook for a muted consumer environment in North America and a softening global macroeconomic environment. Fashion accessory leader Coach, Inc. also reported disappointing same-store sales in the U.S., where traffic to its factory outlet stores declined and discounts were required to entice customers to spend. Coach’s strong Asia results, fortunately, helped the company increase year-over-year sales 12%. Starbucks, meanwhile, said it is bracing for a decline in consumer spending and it lowered its earnings-per-share guidance to $0.44 to $0.45 from prior guidance of $0.46 to $0.47. For the fiscal quarter ended July 1, Starbucks said it generated a 13% net revenue increase and noted that same-store sales in China grew only 12%, compared to 18% in the prior quarter. Economic softness in Europe, meanwhile, pressured results of many companies such as PVH Corp., which offers Calvin Klein and Tommy Hilfiger merchandise, and Ralph Lauren Corporation, which offers clothing and home decorating accessories. Ralph Lauren management noted that “the outlook for consumer spending and global economic growth remains challenging and we are planning our business accordingly.” After a multiyear run of double-digit growth in revenues and earnings, Ralph Lauren’s growth may be in the mid-single digits for this year.
The other bright spot has been the U.S. housing industry. We reasoned that the real estate market was close to bottoming. At the time, we believed that increasing affordability of homes would eventually support a recovery in housing. Since then, homebuilder stock prices, broadly speaking, have increased. Looking ahead, we believe that the U.S. housing recovery will be a multiyear trend. Just as the downturn took four to five years to finally bottom, so will the recovery, we believe, take time to unfold. Approximately 750,000 residential units, including multifamily properties, are being constructed on an annualized basis, which is a very depressed level compared to the typical levels of about 1.5 million new homes built prior to 2008. In some of the most depressed locations, new home building has been down 70% or 80% from peak, and even with a potential 20% to 30% increase over the next few years, would still be well below peak levels. With extraordinarily low mortgage rates and improving, but still poor, availability of bank financing, we see a long runway for recovery. Second-quarter earnings among publicly traded homebuilders were excellent. We start to like this area of the U.S. economy, though we believe that the stocks are due for a pause with many trading at five-year highs as of time being
We are pleased by equities’ resiliency, though guessing stocks’ direction always leaves us uneasy. While we would like to think that market will retest a certain lows sometime because of macroeconomic issues and a lack of clarity over government fiscal policies. However, the research we have gathered and the fundamentals that we have observed in the second quarter are an extremely helpful guide to current conditions and conditions in 2013.
We now have even greater conviction that any dip, in particular any occurring in the next few months, should be aggressively bought. The current resiliency of the markets shows that markets not purely move with macro factors but with corporate fundamentals, which we believe are solid in the U.S. Corporate and, increasingly, consumer balance sheets in the U.S. have healthy levels of cash and are underinvested.
We are highly encouraged by what we've seen in corporate fundamentals and market reactions. We maintain that it is not time to sell equities. Rather, it is time to buy if we have a time horizon that goes beyond years, and buy more on market dips. Clearly, we believe that it is time to embrace equities and the rigorous work of conducting in depth, fundamental research that potentially can uncover attractive opportunities.