Summer Clearance Sale For High-Quality Growth Companies by Tom Galvin, Columbia Threadneedle Investments
- The market is recalibrating growth expectations and the associated risk of not delivering expectations.
- We view this month’s selloff as an opportunity to reallocate capital to our highest conviction names and reposition our benchwarmer list where valuations look more compelling.
- We find these market moments as some of the very best times to invest.
Here is my brief take on this month’s stock market volatility and what it means for high-quality growth portfolios. The market is recalibrating growth expectations and the associated risk of not delivering expectations whether it is a macro issue or company specific like excessive capital spending without an identifiable path to profitability.
The S&P 500 EPS estimates have been in a downgrade mode since last October – and not just the energy sector. Negative profit patterns are garnering negative investment results, and so the multiple expansion of the past few years has turned to a ‘show me’ situation with multiples compressing. Despite the strong dollar impacting many of multinationals, we have seen select companies post low- to mid-teens revenue gains and 20% bottom line increases. As always, we believe that relative EPS strength will lead to relative outperformance.
Not all companies can generate these strong fundamentals and we continue to favor established growth names like CVS and Visa and emerging growth companies like Monster and Celgene to drive consistent balanced growth. The market has been discouraged by and has reacted to elusive EPS growth for many firms. It’s also important to remember that high-quality growth stocks have experienced a decade-plus period of net redemptions that accelerated earlier this year. No one is chasing this asset class.
China is one of the many contributors to global growth, roughly 15% of global output. While China’s targeted 7% economic growth is still fast compared to developed western economies, if achieved it will be China’s slowest in about a quarter of a century. Recent financial market turmoil, negative economic growth revisions and a devalued currency have all resulted in a risk-off sentiment leading to lowered asset prices. Companies with indirect exposure, e.g., Nike, Novo Nordisk and Visa, can hopefully manage through the environment via financial or natural hedges.
We believe the market will continue to speculate on when the Federal Reserve will make its first rate change. If we had a say, we would prefer the Fed to raise rates next month so we can get the issue behind us and demonstrate that high-quality high-growth companies have the right product or service at the right time to deliver above average levels of profitability and attractive returns for investors. Time will tell when the Fed does make its move and will continue to create near-term uncertainty until we have a resolution one way or the other.
In conclusion, we have continually seen investors grow more uneasy in the information void periods between corporate earnings periods when the investors only have macro data to digest. We currently view this month’s selloff as an opportunity to reallocate capital to our highest conviction names and reposition our benchwarmer list where prior valuations may have been full, but today look more compelling.
We find these market moments as some of the very best times to invest. Not all companies are created equal. We are living in a deflationary boom which is good for unit growers but challenging for others who may be forced to endure profitless prosperity. As always, we remain consistent in our process and we remain patient investors, which has been key to our success over the last decade.
