CROCI during the Crisis: Performance, Valuation and Historical Comparisons

Presented by

Colin McKenzie

About this talk

2020 marks the 25th year of CROCI and the fifth economic crisis that the team has witnessed. During a crisis, rational behaviour can often fall victim to fear. In periods like these, it is tempting to let emotions overrule rationality. But the best approach is to maintain discipline, redoubling focus on levelheaded company analysis and valuation. Such an approach has paid off in the past; there is no reason to believe it will be different this time, as in the long term equity prices are driven by fundamental valuation. We examine: 1.The performance of CROCI strategies in Q1. 2.The performance in previous sharp downturns, most particularly during the Great Financial Crisis 3.The positioning of equities today, in terms of valuation and other characteristics Our analysis suggests: • Physical asset-owning companies have underperformed those with intangible capital. • A large divergence between regional strategies. • In the Great Financial Crisis of 2008-9, CROCI strategies initially underperformed in 2008 as volatility rose, and then started to outperform strongly roughly three months after the peak in volatility. • The global cost of capital rose from below 4.9% before Covid-19 to over 5.2% in mid-March, then reaching 5.1% today. • Using our conservative 2021 estimates, we find attractive pockets of value for patient equity investors.

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