Growth stocks (again)

Headlines

We’ve been writing about Growth stocks, mainly because we are a) very interested and b) very underweight.

Detail

Generally speaking, our direct equities process is QGARP, Quality Growth at a Reasonable Price, and usually in that order, meaning an emphasis on Quality first, Growth prospects second, and a Reasonable Price consideration at the end, assuming the first two stack up well enough (if a stock’s thesis hangs solely on the RP bit, it usually has to be really cheap first).

And so, it is relatively unusual for us not be holding a greater preponderance of growth stocks, in our direct equity portfolios, which is the situation we are presently in.

For many years we held stocks like TCL, ALU, SHL, RMD, enjoying excellent returns, until they eventually got simply too far ahead of themselves. Even CSL, otherwise held for over a decade, was trimmed back from a material overweight in the pandemic, to a slight underweight at present.

And, as you’ll have seen from our many recent notes (here, and here) on the topic, the past few months have seen many growth names de-rated, by quite a lot, e.g. FPH, DMP, XRO, RMD, CAR, DHG and friends, but still (in italics, for emphasis) many trade closer (and in some instances comfortably above) 30-40x forward earnings. IEL, the language and education services provider, still trades at an enormous 7x sales, let alone earnings.

Simply put: it seems “too soon” to tilt back towards secular growth.

Here’s the AQR version of this conversation. The expensive stocks are still very very expensive, and the value stocks still very very cheap. We ain’t seen nothing yet, such a model would suggest.

Our own work shows much the same outcome, split apart into separate constituents. For the most part, the dispersion is as wide as ever.

Conclusion

To the extent that you believe rates are the causal factor behind the repricing (and boy do we think that is a big part of it) it is very hard to get in front of multi-month back to back rate hikes, as the Fed moves “expeditiously” towards neutral.

Combining the two concerns, the size of the value spread, and the macro headwinds, it is hard to see current falls as sufficiently enticing.

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