In professional sports, every coach implores their general manager to provide them with world class “two-way players”.
A two way player represents the teammate most typically assigned a defensive role, who can, on a dime, turn up the heat and either pile up abnormally high offensive points, relative to their assigned role, or force key turnovers for the benefit of the entire team. If the two way player carries an offensive role, they demonstrate their defensive mettle by “not” dropping or turning over the ball, by not generating unforced penalties and by being fully capable of going above their designated position and prevent the opposing team from scoring upon them if another teammate fumbles/drops the ball or loses the puck.
A two-way player demonstrates their utility throughout the regular season, but it is in the playoffs that they truly excel, because playoff season is coached differently than the regular season. During the regular season, teams endeavor to pile on more points than competitors and gain that much-vaunted playoff slot. In the divisional and championship rounds of the playoffs, the focus shifts to favor a balanced team, one that can both score, but as importantly, prevent being scored on. And that is where the two way player becomes essential in the championship run. They have the ability and the discipline to step up their game in the event that a star player gets injured or goes into a temporary slump, generating points, maintaining forward momentum while still keeping the opposition in check.
Broadly based economic expansions are the financial equivalent of a professional sports “regular season”.
Every publicly traded company gets an opportunity to participate, and the market quickly gets divided into a handful of supposed “offensive stars”, a much large group of utility players, a smaller core of two-way players and finally, some sad sack businesses that don’t particularly have a reason to be on any team, but nevertheless, there they are.
As the regular season progresses, those holding a portfolio of too many utility players become increasingly envious of offensively structured teams that pile up yardage and score points, so they engage in trades; utility players are dumped and bidding wars are fought over offensive talent.
Portfolio composition and investment allocation all comes to a head in the “economic” playoffs.
Differing from most, I don’t bemoan the end of an economic expansion phase. No, to me, this represents the post-season; the winning teams are separated from the also rans in sudden death matches where the loser sits out the remainder of the season and maybe winds up on the trading block prior to the next economic upcycle. The relative merits, or lack thereof, of any business model are fully revealed/laid bare during the playoffs. To me, bear markets, economic stagnation; this IS playoff time.
Grupo Comercial Chedraui is a “lowly” grocer, a defensive market sector sniffed at indifferently by growth oriented investors throughout the entirety of the 21st century.
For Q1, 2023, the company reported revenues of $3.56 billion, EBITDA of $299.3 million, operating profits of $193.6 million and a net profit of $89 million. This represents a year over year growth rate in sales of 6.1%, an increase in EBITDA of 14%, an increase in operating profits of 22.8% and a net profit increase of 46.3%.
The US grocery business is larger than the Mexican operations by revenue and for reporting purposes, USD is converted to MX pesos on the financial statements. (I convert back to USD on each fiscal report as Chedraui is largely disinterested in cultivating a US investor base). Had the USD remained constant in Q1 (it declined 8% vs the peso) corporate revenues growth year over year would have exceeded 10%, well above core inflation. In a playoff market, Chedraui is certainly performing as a two-way player of note.
https://www.grupochedraui.com.mx/wp-content/themes/chedraui/index.html/documentos/comunicados_prensa_ingles/Earnings_Release_G_Chedraui_Q1_23.pdf
Microsoft reported a fiscal result in Q1 (their fiscal year differs, so for MSFT, it is referred to as Q3) that resulted in a NET PROFIT MARGIN, AFTER TAX, of 34.6% and up from 33.9% in the prior year.
Mull that margin over for a moment, journeyman software firms would be quite happy to report a gross profit margin somewhere in the region of what Microsoft nets out. That’s the difference between a world class firm and an also-ran. Revenue was up 7%, to $52.8 billion. Gross margins were 69.4%, up from 68.3% as compared to the prior year’s quarter. Microsoft’s books are so strong that they were able to defer some profits, often normally accrued by weaker firms under the comprehensive income line. Very few firms in this market are reporting comprehensive profits above the net.
Microsoft is living up to its reputation as a core two way player by NOT dropping the ball in this playoff cycle; the earnings are sufficiently strong that company is stabilizing a NASDAQ vacuum left hanging through an index overpopulated with one way, offensive “floaters” that currently find themselves without the ball in this economic environment.
https://www.microsoft.com/en-us/Investor/earnings/FY-2023-Q3/document/viewdocument/MSFT_FY23Q3_10Q.docx
Financial service firms, particularly banks, can represent the “pathogens” of a bear market.
Like a virus, once a financial service company becomes infected, the chain of transmission almost inevitably sweeps throughout the entire banking herd, culling the weak and the elderly. The greatest risk to general investors is always of interspecies viral jump, leading to a full on contagion, but the lesser risk is that banks never fully recover from the virus that they, themselves, created through their corporate financial service experiments, akin to “gain-of function” research (hey, lets combine floating rate short term bank deposits with a simultaneous purchase of 30 year treasury bonds, that’s a great way to goose up profits, why hasn’t anyone thought of it before?), and degrade into a zombie bank.
A strong and consistent result from Visa goes some way towards indicating to the markets that not all financial service firms have fallen prey to the “asset-mismatch” gain-of-function virus.
Visa Q2 revenues (fiscal quarter differs from the calendar year), at $8 billion, were up 11% year over year. Net profits, after tax, were 53.3% of revenues.
In a highly and persistently inflationary market, it was somewhat gratifying to learn that network and processing charges declined, not on a percentage of revenue basis, but, rather, on an absolute basis. Also, as a welcome change, Visa made no acquisitions of profit draining businesses in the quarter. Maybe, for the first time in the past decade, Visa finally gets it, that they have some discretionary ability to control expenses. It is refreshing, certainly surprising, to to see that Visa is stepping up defensively to protect its balance sheet, which is what one expects from a two-way player during the playoffs. Let us hope this persists.
https://www.sec.gov/Archives/edgar/data/1403161/000140316123000027/q22023earningsrelease.htm
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