Will growth or value deliver for investors in the new normal?

Portfolio manager breaks down his approach to each area in today's uncertain markets

Will growth or value deliver for investors in the new normal?

While the story of April’s market rebound was largely defined by tech growth stocks like Shopify, one portfolio manager says that investors shouldn’t disregard value stocks as they build portfolios to perform in the "new normal".

Chris Stuchberry, portfolio manager at Wellington-Altus Private Wealth and member of the Stuchberry group, says that while uncertainty remains the watchword of contemporary markets, the forces that drove some of tech’s remarkable growth in August will soon be felt on the value side. He says, too, that investors looking for growth can still turn to tech, but advisors should inform those investors about some of the potential risks in that area. Stuchberry says that while it’s still too early to know what the future may hold, taking a balanced approach and closely watching key indices should set up investors to succeed in the post-COVID market.

“There were two major central bank decisions that have created the situation we're in,” Stuchberry says. “[In February] we saw coordinated global central bank action which cut interest rates all the way down to zero, virtually on a global basis. As we started to see how significant the closing of the economy was, the central banks in a coordinated effort started quantitative easing, using the central banks’ balance sheets to buy assets and to support markets, they pumped money into the system and ensured we don't have a credit crisis.

“One of the repercussions of that is you revalue everything on cheaper money. The market has gone to the assets it likes the most first and a lot of these strong growth stocks have revalued at a different level first. We can look at an Amazon at the beginning of the year, which was, you know, around 1800 is now 2400. Shopify has been revalued over $1,000 a share. We haven't seen that occur in the value stocks so far but they haven't had that bounce back. And we believe that that trickle down will occur over time.” 

Stuchberry says investor psychology has driven growth’s stronger performance out of the gate, reflecting the trend of the past few years as growth outperformed value. Many companies in the growth sector, largely in the tech industry, have shown strong balance sheets and high quality. Stuchberry says that investor preferences for growth will start to change, though, as investors find it easier to buy a value stock at a discount than a growth stock at an all time high.

Attractive as those growth stocks are, Stuchberry says investors should look at them with an element of caution. Having seen the single day Facebook lost $100bn in valuation in 2018 and the single day this past January when Amazon’s valuation gained $100bn, Stuchberry stressed that the industry carries some high risk along with its promise of rapid growth. Slower growth could result in massive corrections. When picking tech growth stocks, Stuchberry looks for strong fundamentals before looking at a compelling narrative, especially now as so many tech companies have become highly visible in our current reality.

Stuchberry looks for principles that will keep an investment out of trouble, notably a low debt load, a slow burn rate, or even a positive cash balance. Nevertheless, he says moments like Facebook’s surprise correction in 2018 do occur and investors, and their advisors, should remain aware of that.

Stuchberry is increasingly positive about value stocks at the moment, especially some Canadian financials. He says that on Monday, the Bank of Nova Scotia was just below its book value on Monday, but with an earnings report in May including huge provisions for bad loans, the bank has still managed to make their dividend yielding nearly 7 per cent. Stuchberry expects a quick revaluation as financials show they’ve managed to protect their investors and continue to yield.

While Stuchberry doesn’t have any investments in the REIT space he notes that most REITs concerned with rent collection have cut dividends quickly, pushing them down, but in the cases of some REITs that space left by the cut dividend might allow for a quick rebound. He says that investors looking at that space should ask if a particular REIT is fundamentally altered by our current reality, such as a shopping mall, or if they aren’t facing a truly significant change.

Stuchberry is currently taking a balanced approach to asset allocation, noting the performance of growth and the potential for well-chosen value. He’s exercising caution, too, leaving brick and mortar retail out of his portfolio, with the exception of Home Depot as an essential business, and ensuring that the growth companies he holds are diversified enough to weather a significant correction akin to Facebook in 2018.

Looking at the big picture, Stuchberry says he’s paying close attention to jobless figures to understand the state of the economy. He notes a rapid decline in jobless claims since April’s record highs as a sign that Canada might be hitting its unemployment floor. He’s looking at bond yields too, largely as an indicator that more bond money is likely to enter the stock market. As well, he says he’s watching government decisions closely around both economic support and measures to reopen sectors of the economy. While he says its crucial to understand those metrics, Stuchberry also says that in making investment decisions, investors and advisors should be focusing first and foremost on fundamentals.

“Ultimately, a good company is a good company,” Stuchberry says. “If you can buy a company with 50 billion cash, no debt, and have it depressed in this pricing point, you can control all of those things, but you cannot control the amount of employment, what's going to happen with the stimulus and so on. When you have those micro filters that you can use on a company, you can even be comfortable with your holdings when you have a moment like that in in the portfolio.”