The banking sector, current markets, and long-term opportunities in growth stocks are topics of discussion between Tom Ognar, senior portfolio manager and managing director of the Dynamic Growth Equity team, and Jon Lagerstedt, director of Internal Sales at Allspring.
Tom Ognar: Our wisdom is stay invested, try and diversify, and as an active investor, an active portfolio manager, that’s where you really have an opportunity to add value to clients’ portfolios. And we feel like we’re in that environment.
Jon Lagerstedt: That’s Tom Ognar, senior portfolio manager and managing director of the Dynamic Growth Equity team here at Allspring Global Investments. I’m Jon Lagerstedt, director of Internal Sales, and you’re listening to On the Trading Desk®. Today, we’re discussing the current markets, as well as long-term opportunities in growth stocks. Thanks for being here, Tom.
Tom: Hey, Jon, it’s a pleasure to be on with you today.
Jon: Likewise, likewise. And I got to start with the obvious, Tom, and top of mind for a lot of folks is what’s going on in the banking sector today. I would love to know, for our audience, what is your take and how should investors be approaching the market nowadays?
Tom: Yeah, Jon, it’s probably our number one question we’re getting from our clients today. And I would think about it in a couple of ways. One, obviously, the banking sector is the central nervous system of the financial markets, but I also think of it as the blood or the circulatory system of the economy. And so, we need to look at the impact not just on the financial markets, but the economy. I think the result is the Fed (Federal Reserve) is going to have to digest here. It’s moved very quickly, very aggressively. It needed to, but it probably needs to pause and digest. I think that’s what they’re starting to signal. And then the second thing that seems pretty obvious is that once again, the government is willing to step in and prevent a crisis. And so, I think that should give investors confidence. And on the growth side, which is really our specialty, lower interest rates tend to cause lower discount rates, which tends to be good for valuations of growth stocks. Now, we don’t think it’s the runaway growth universe that we were in three or four years ago, or even two years ago. You’re going to have to be disciplined. But we have better valuation opportunities now than we did a year ago and I think the market will be more focused on that.
Jon: Excellent. Valuations and discipline, the name of the game. Tom, we wrapped up in earnings season, not all that long ago. And broadly speaking, how are earnings estimates and valuations looking to you within the growth space?
Tom: Yeah, I’ll be the first to admit valuations got extended a couple of years ago. We were pushing new highs, I think driven by extremely low discount rates, so we could make that math work, but it was dependent upon a very low interest rate environment. And as we know, the Federal Reserve or the central banks around the world were really coordinating that or really the causation of those very low interest rate environments. And once that started to unwind, valuations needed to come down. And they’ve come down a lot. We would point out they’ve come down the most down to market cap in the small- and mid-cap space. But even among the larger caps, you’ve seen valuations come in a lot. And I think once we get into a more stable environment, stable macro, stable interest rate environment, then what you bring up—earnings, cash flows, EBITDA (earnings before interest, taxes, depreciation, and amortization)—are really going to be what helps drive valuations of companies going forward. And we think that has started to look interesting. I’ll also admit earnings revisions have been negative. They’ve been coming down. Earnings were still growing a bit year over year, but it’s not the robust pace that it was two years ago, nor what it was expected a year ago. But we think that’s starting to level off. It’s starting to be able to model that earnings power, that cashflow power out into the future. And if we can do that, we think there’s a lot of opportunities here. Again, I think, what our team thinks, is you have to be disciplined about it. And really, what we think looks like the fat pitch or the opportunity, the biggest opportunity right now, is for this market to broaden out, for it not to be driven by just the mega caps. It’s not to say don’t own some mega cap. But that’s not going to be the vast majority we feel. It might not be the vast majority of returns going forward. And a broader market with more stable interest rates and an economy that potentially is slower, that usually presents opportunities for us as growth investors.
Jon: Got it. Makes a ton of sense to me. And thinking on what you just said and maybe extrapolating just a little bit, Tom, how do you see the market dynamics playing out for the rest of 2023?
Tom: So, I’ll say this again. The free money, an extremely liquid dynamic, in our opinion, is over. That was hopefully a once in a lifetime or at least a once in a generation experience. We think that leads to less crazy valuations. We think this phenomenon of what I call “one slogan investing,” one decision, not looking at risk, not looking at valuation, we think that’s in the past. We think the market is going to be broader. You had mega caps dominate for the last few years. Deservedly so, they were growing at a very, very fast rate. They were taking a lot of share in the economy. That has started to slow. And what the data tells us is once the market digests that, once interest rates stopped going up like they have, the market broadens out. Small and mid-caps start to have opportunities. It’s not as much of a risk-off environment for investors. If we look at valuations, it really looks attractive relative to history down the market cap. And so, we feel having this approach where you have exposure to multiple market caps is an efficient way to invest at this opportunity. And we think you can’t afford to be too concentrated. So, just as this market has showed you in 2022 and if you were overly concentrated in growth and not in value, that hurt. In the beginning of this year, that’s reversed where growth has really started to dominate versus value. We think similarly amongst the market caps. Be cognizant of where your portfolios are in that you have exposure, again, not to just mega-cap companies that dominate the indexes or a broader opportunity set that hopefully we’re presenting to our clients and building into the portfolios and have a lot of opportunity here to succeed.
Jon: Awesome. Extremely insightful comments. And Tom, with the time we have left today, do you have any parting thoughts or words of wisdom for our listeners?
Tom: Markets are hard to predict. Again, as we saw, a lot of people felt like they needed to be overweight growth and then value comes back. Going into this year, I had a lot of questions, should we even own growth? And now growth has started to improve this year. And so, our wisdom is stay invested, try and diversify. And we’ve been dominated, again, the indexes have been dominated by a very select group of stocks for the last 5, 10 years. Historically, that runs its course and that presents more opportunity. And as an active investor, an active portfolio manager, that’s where you really have an opportunity to add value to clients’ portfolios. And we feel like we’re in that environment.
Jon: Fantastic. Well, thank you, Tom, for being with us today and sharing your insights.
Tom: Yeah, thank you, Jon. Always a pleasure.
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