U.S. shape

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Great swathes of the U.S. stock market are being ignored as investors crowd around high-tech stocks, says Ryan Fitzgerald, vice-president, U.S. and international equities with Beutel Goodman Investment Counsel.

He said high-quality companies in sectors such as big pharma, biotech, consumer staples and consumer discretionary are being overlooked as the market focuses on artificial intelligence, cloud migration and the digital transformation.

“We’re finding tremendous value,” he said. “A very bifurcated market — like we’re seeing right now — makes us very excited for the long-term opportunities that we’re able to uncover.”

Fitzgerald said valuations tend to be overestimated when markets become myopically focused on themes.

“If you look at the S&P 500, the top five largest companies in the S&P 500 make up approximately 27% of the overall index. This is extreme concentration,” he said.

“We are in a market that has become very thematic and very enamored with growth. And it’s in these types of markets where valuations get stretched.”

Fitzgerald said investors need to stay grounded in fundamentals, rather than getting starstruck by popular companies. And market obstacles, far from being a negative factor, should be seen as a way to create attractive entry points.

“Identifiable headwinds are the reason you can invest in good companies at very good prices,” he said.

The current round of inflation, for example, has created opportunities in grocery companies like Chicago-based Kellanova (formerly Kellogg’s) and Camden, N.J.-based Campbell Soup.

“They’ve put through lots of price increases to combat the cost inflation that they saw in 2021 and 2022. It’s having what we believe is a temporary impact on volumes, causing the whole sector to be out of favour,” he said. “That’s the type of thing we look for as an opportunity.”

Fitzgerald said 15% or 20% stock market fluctuations — while potentially unnerving — are normal. The real danger is owning a low-quality business with a balance sheet issue and nervous shareholders in a dubious market. That’s when you can see value drops of 80% or more, he said.

“We try to take that completely off the table. We’re very conscious of investing in companies with solid balance sheets that manage their debt very conservatively,” he said. “We look for quality businesses with good returns on capital, good management teams, good margins and with end markets that grow over time.”

Being patient is a key part of success in volatile markets, he said.

“Wait for valuations to come down,” he said. “The combination of quality and a reasonable price is a recipe to mitigate that downside.”


This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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