While value stocks are on a roll, it’s important not to forget about growth stocks altogether, a portfolio manager from CIBC Asset Management says.
Growth stocks outperformed value stocks for more than a decade following the financial crisis, but that started to change in fall 2020, as vaccine breakthroughs changed the pandemic outlook, said Craig Jerusalim, senior portfolio manager of Canadian equities at CIBC Asset Management.
On a total return basis, the Dow Jones Canada Select Value Index started this week up more than 31% over the previous 12 months, compared to an 11.6% gain over the same period for the Dow Jones Select Canada Growth Index.
“Many value stocks are tied to the general economy,” Jerusalim said. “Once the developed world refocused on the economic re-opening and away from the ‘stay [and] play from home’ stocks, a natural reversion to the mean occurred.”
Jerusalim noted that energy and financials have the greatest influence on the value index. The combination of rising interest rates and improving supply fundamentals for energy “gives a rational boost to those cyclical value sectors.”
Some growth stocks, meanwhile, were exposed. However, the run-up early in the pandemic wasn’t a “big technology bubble 2.0,” Jerusalim said. Companies such as Apple, Microsoft and Shopify saw some expansion in their price-to-earnings multiples, but it was the hype around “low-quality, fantasy securities” that led to the sell-off in growth early this year.
Jerusalim said the market correction is “healthy,” and that rising rates naturally have a downward influence on expensive multiples, as future cash flows are worth less.
So how should investors approach growth stocks now?
“The key now is to sort through the technology and growth company carnage and seek out the highest-quality companies that have been tossed out with the proverbial bathwater to find the companies that can rise from the ashes and become the next 10-bagger,” Jerusalim said.
There are “great” growth companies with very good underlying metrics that are now trading at valuations comparable to traditional value stocks, he noted.
The current situation gives growth investors “chances to win” if those premium multiples ever return and if there is confidence in the quality of the business model and the subsequent growth and earnings, he added.
“Remember, a great company like Amazon had to endure four different 50% drawdowns, plus one 90% drawdown, on its journey to a trillion-dollar company,” he said. “While growth investing isn’t for the faint of heart, it can be incredibly rewarding when done with discipline and conviction.”
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