If you focus on growth at a reasonable price, or GARP stocks, you likely had a tough 2016. Last year was “probably the most difficult year [for GARP] since, say, 2009,” says Chris Ibach, a portfolio manager for Principal Global Advisors in Des Moines, Iowa.
In 2016, he adds, the market was mainly driven by “the relief rally of the materials and energy companies, […] and that really bled through the entire market. We see it as more balanced today.”
Ibach, whose firm manages the Renaissance Global Equity Private Pool, says, “[Now], the asset valuation spreads that we see in the [broader] market are much narrow[er], and stocks are likely to be driven more by fundamental earnings and earnings growth rather than complete asset revaluation.”
Ibach points to two sectors he favours as a result: financials and healthcare.
“On the back of the election in the U.S.—if we can stay away from the populist talk […]—the financials area can continue to do well,” says Ibach, even though it’s lagged in recent years. Overall, if U.S. firms benefit from a reduction in “some of the regulations and the big add-ons that they had to take during the last seven years, [their] profitability would improve, and ROEs would go up significantly. [Financials are] an area that we believe will offer significant opportunity.”
Ibach also favours healthcare. “It was the worst performing sector last year,” he notes, but “the opportunities are much greater now for [GARP] than they were a few years ago.” The IT and industrials sectors should also see upside, he notes.
Ibach’s less optimistic about staples, telecom, utilities and, despite the relief rally last year, materials. “Materials are a little harder for us to get our hands around because they have run up so much, and the fundamentals around the globe still aren’t extremely positive to support some of these high valuations,” he explains.
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Same sector, different outcome
Healthcare is promising for GARP in 2017, but there can be divergence in the space. Ibach saw this occur with two companies last year: AMN Healthcare was one of his firm’s top performers in Q4 2016, while Amgen was a different story.
“The two companies are in very different businesses,” he explains. “AMN is in healthcare facilities and employment within these healthcare facilities, and hospitals continue to see very strong occupancy. So profitability continues to do well. AMN is going to be one of those cheap beneficiaries.”
On the other side is Amgen, a biopharmaceutical company. “Amgen disappointed [in 2016] on the back of some potential growth numbers. Management downgraded growth guidance from around 10% to low single digits over the next several years, and the stock sold off on that.”
But things are looking up for Amgen. Says Ibach: “Amgen wasn’t a strong performer in 2016, [but] the company is very innovative and very strong, and still offers significant upside. The stock has moved and responded very well to the valuation opportunity [and] that growth potential that people see.”
Since mid-March, Amgen’s stock has dipped from about US$182 to US$163, but it’s still above where it started the year (US$150) and is trading well relative to its performance over the last 10 years.