Stacking coins

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Regardless of which investing style is in vogue, the fundamentals of a company are what matters, says Caroline Edwards, senior investment director in the Global Investment Strategies Group at Putnam Investments.

Although she manages a value fund, Edwards said she does not feel confined by that label.

“We are more than happy to invest in growth stocks [with] a reasonable valuation,” she said. “Value and growth are not mutually exclusive.”

Trying to time the market for either growth or value is challenging, if not pointless, she said.

“Value is not going to disappear. We don’t think we’re going back into an environment where growth will dominate for the next 15 years and value becomes inconsequential,” she said. “We’re happy to find growth stocks that are trading inexpensively. And I think any growth manager would love to find growth stocks that are trading inexpensively too.”

If anything, persistent inflation and persistent higher interest rates will likely keep value relevant, she said.

“We absolutely think that value can continue to work, even if it does become a growth environment,” she said. “So, we would say to not abandon one in favour of the other.”

Downside protection

Edwards said value stocks have built-in downside protection because their price is more flexible.

“Growth stocks trade at a premium. They’re priced to perfection. And so, when you start to encounter some more difficult environments, that rich valuation is no longer supportive, and you run the risk of seeing a lot of decline,” she said. “Value stocks, to the contrary, are already trading at pretty inexpensive prices. And that cheapness in their valuation offers a little bit of a floor.”

And while the direct impact of inflation and interest rates on growth stocks is notable, the inverse impact on value stocks is a compelling story, she said.

“There is a bigger impact on growth stocks, because you’re valuing future cash flows versus near-term cash flows,” she said. “More interesting to us, however, is the fundamental drivers of value stocks that make them more interesting during high-inflation and high-interest-rate environments.”

Dominant sectors in the value universe are financials, energy, materials, industrials and healthcare. But she doesn’t restrict herself with sector distinctions. She’s looking for companies with strong fundamentals.

In the materials sector, she likes Arizona-based copper producer Freeport-McMoran Inc., Indiana-based agricultural company Corteva Inc., and Ireland-based construction materials supplier CRH plc.

“Those are three very independent companies that we have some very strong fundamental views behind,” she said. “It’s not that we have necessarily this huge bullish view on the individual sector. It’s really more that we found some good individual ideas.”

In healthcare, a traditionally defensive sector, she likes New York-based biotech company Regeneron Pharmaceuticals, Inc., Texas-based drug distributor McKesson Corp., and England-based pharma company AstraZeneca plc.

“And, again, it’s not because we like the biotech or pharma sector. It’s because we’ve found some really unique stories about each of those,” she said.

Among traditional growth players, she likes Texas-based tech company Oracle Corp., which has become a competitor in the cloud industry and is currently third behind Microsoft and Amazon. Edwards believes Oracle is significantly undervalued.

“We have that big opportunity there,” she said. “You can be a growth stock and be inexpensive.”

Avoiding value traps

Edwards pointed out that in the value space, everything is probably “cheap for a reason.” That in itself does not make it a value trap.

“OK, it’s trading inexpensively because of XYZ — some event happened — or the market has less of an appetite for this type of a business. That’s fine. We need to understand those reasons,” she said. “And then we also need to find multiple ways to win.”

She said her investing theses are always built around finding more than one thing that can help stocks be revalued.

“You can’t just say, ‘The market just doesn’t appreciate this. It will come around.’ That’s probably one of the most dangerous things for us to be building a thesis on, because the market doesn’t always come around,” she said. “We try to find stocks where we can have different theses that could be working at different times.”


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

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