By Ryan Crowther, Portfolio Manager, Franklin Bissett Investment Management
and Yan Lager, Portfolio Manager, Equity Research Analyst, Franklin Equity Group
(Sponsor Content)
For well over a decade, investors have focused on growth stocks: shares of companies expected to grow faster than the market average. But in recent months, the calculus has changed. Market volatility, driven by ongoing COVID-19 concerns, Russia’s invasion of Ukraine, rising interest rates and inflation, has led to a noticeable shift to value stocks. As investors focus on companies with strong fundamentals and comparatively lower-cost shares, do growth stocks still have a place in a diversified portfolio?
Financial Independence Hub: How would you describe the current landscape for growth stocks?
Yan Lager: We’ve been witnessing one of the most pronounced rotations from growth to value stocks in decades. In retrospect, following a multi-year run for growth-oriented equities that were clear beneficiaries of ultra-low interest rates, a rotation to value stocks as interest rates increase is not surprising to us.
Ryan Crowther: Looking at growth stocks generally, the terrain has become much more challenging in recent months, both in terms of the outlook for business fundamentals and a more discerning investor sentiment.
Have all growth stocks been hit equally hard?
Ryan Crowther: This is an important question, because when there’s a broad sell-off and a significant number of stocks drop sharply, they might all be considered “growth” stocks; but do they really share the same fundamentals? What risk versus return is the share price truly discounting? That’s where our GARP approach (growth at a reasonable price) has proven powerful for over 40 years, as it helps avoid focusing too much on whether a stock sits in the growth or value basket.
Which stocks have been most affected by the recent pullback in equity markets?
Yan Lager: Companies that benefited from the pandemic shift to working from home and the broader adoption of e-commerce, or persistently low interest rates, have seen their shares pull back due to profit-taking or concerns that future earnings performance may fall short of pandemic-high levels. Harder-hit stocks have included earlier-stage companies in the information technology sector, which have seen significant price and valuations fluctuations. We’re constantly reassessing the fundamental, longer-term investment theses and strategic merits of our investments.
What types of companies do you look for?
Yan Lager: In managing a global growth fund, we believe that owning a diversified portfolio of high-quality companies with strong secular growth drivers, unique competitive positions and capable management teams can deliver attractive returns, as ultimately share prices follow fundamentals. This is particularly the case if you’re investing for the long term, which we believe you should be if you’re investing in equities.
Ryan Crowther: We look for businesses with strong, consistent earnings and growing cash flow—attributes that will hopefully work to offset some of the factors that can challenge growth in the near term. In addition, a company’s valuations must also be attractive. We focus on combing through our investment opportunity set to find stocks offering a good risk-adjusted return profile over the course of an economic cycle.
Where are you finding opportunities these days?
Ryan Crowther: Focusing on mid- to large-cap Canadian companies, we’ve been active in securities that sold off as part of the broad weakness in growth stocks. We took advantage of that weakness to add new, quality companies at an attractive entry point. The shift — from the largely complacent and speculative equity market generally experienced throughout the pandemic — to the less forgiving market, characterized by a more rational mindset thus far in 2022, has created opportunities for us. Continue Reading…