Chris Ibach, a portfolio manager for Principal Global Advisors in Des Moines, Iowa, adds to high-performing positions in his portfolio when they exhibit three characteristics.
He looks for companies that:
- exhibit positive and sustainable fundamental change;
- have expectation gaps between “what we believe will happen to the company and what the market or consensus believes,” he says; and
- have attractive relative valuations, given he doesn’t want to pay too much.
Ibach, whose firm manages the Renaissance Global Equity Private Pool, says, “If we see companies that exhibit [these three things] and that we currently hold or potentially that we don’t hold, we can look to add to those positions. Ultimately, those key characteristics drive companies to outperform over the long term.”
If he already holds a top performer, he’ll add to it when he sees “significant numbers of positive catalysts, combined with an attractive relative valuation, that would still imply to us that there’s upside in the company.”
For instance, when Trump won the U.S. election and the Republican party swept both the House of Representatives and the Senate in Q4 2016, “It was apparent we were likely to see less regulation [and] less taxation, and particularly the companies that would benefit would be the financials that had been in the doghouse for the last several years, after the financial crisis.”
At that time, names like Morgan Stanley and Bank of America became attractive. He expected “these companies would see significant changes in regulation […] as well as a steepening yield curve, which would help their types of business.”
Along with the positive market catalysts, the fundamentals of those names were attractive. Plus, says Ibach, “the valuations had been beaten down for a number of years because of bad press,” he adds. “Positive change in catalysts, combined with an attractive valuation, lead us to purchase the stock[s].”
Ibach also points to Macquarie, another global bank, but says, “Morgan Stanley and Bank of America should be significant beneficiaries of some of the changes that’ll likely go on with the new administration.” Macquarie, while also benefiting from that, should also see a bump from “just the general environment that we’re seeing globally as well as in the Australian market.”
When it comes to timing purchases, that depends on how attractive a stock is and what’s driving improvement. “If we see a catalyst come to fruition, we would be more likely to purchase even when a stock is moving higher because we see more upside being released.” On the other side, he adds, he may wait if “the news isn’t as strong and the fundamentals aren’t as cheap.”
Ibach concludes, “If a company that we hold falls [in price] and the fundamentals haven’t changed and we have a relatively low weight, we may increase the position as the market gives us those opportunities.”