Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about how inflation and interest rates impact value stocks with Caroline Edwards, senior investment director with Putnam Investments. We talked about names and sectors she likes, and we started by asking what downside protection value investing offers.

Caroline Edwards (CE): So, to start quickly on the downside protection, if you were to consider where valuations would be trading, growth stocks are trading 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. 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 some downside support. I think it’s a very different question, though, to chat about inflation and interest rates and their impact on value stocks and growth stocks. I think in the end, it’s not just the impact on value stocks overall, but it’s the inverse impact on growth stocks and why value is more interesting. Growth stocks, their focus is really on those out years. Value stocks, their focus is really on the more recent numbers. So, you’d have a duration mismatch there. And so, you have a bigger impact on growth stocks, because you’re valuing the future cash flows versus more of the near-term cash flows.

Avoiding value traps

CE: I don’t think it’s fair to say, ‘Well, if it’s cheap for a reason, then that’s a value trap, and you need to be able to avoid it.’ We just need to understand those reasons. And then, more importantly, is building out that fundamental thesis of, ‘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 really need to understand those reasons. But we also need to find multiple ways to win. We try and find stocks where we can have different theses that could be working at different times. You know, different parts of the thesis can work at different times. And that approach helps avoid some of those pitfalls because you potentially have something else that could work for the stock if one part of that thesis doesn’t fall apart.

Who she likes in materials and healthcare

CE: Our largest overweights in the materials sector are Freeport-McMoran, which is a copper producer. The next largest overweight is Corteva, an agricultural company. And then the third is CRH, which is a construction materials company. Those are three very independent companies that we just have some very strong fundamental views behind. We have a slight overweight to healthcare stocks. Our favourite names there: We have Regeneron Pharmaceuticals, which is actually considered a biotech; McKesson, which is a drug distributor; and then AstraZeneca, which is a pharma company. So, we’ve found some really unique stories about each of those stocks.

A tech stock that fits the value mould

CE: The other name I’ll talk about is Oracle, which is a — I mean, everybody is going to know it — it’s a technology company, which most people don’t think along the lines of value but it’s actually a name that’s in the value index on the tech side. But what Oracle has done is really started to reinvent itself and has become a huge competitor in the cloud industry. So, a third competitor really to Microsoft and Amazon, and we think that’s really underappreciated. And the way they’ve designed their software is unique in that it can fit within the framework of other software that companies are already using. So, it provides a really nice added value to potential customers. And that’s just been a stock that has been a low-growth tech stock for a while, that is going through a little bit of a reinvention here, and is probably underappreciated as one of the bigger competitors in the cloud space.

And, finally, what’s the bottom line when it comes to investing in value over growth?

CE: Value and growth are not mutually exclusive. We are more than happy to invest in growth stocks that we have found have a reasonable valuation. Trying to time the market for value versus growth, I think, is really challenging. Number one, we think we’re going into a period where 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. We’re looking at a little bit persistent inflation, a little bit of persistent higher rates than we’ve seen over the last decade or so. And that’s going to keep value relevant. We absolutely think that value can continue to work, even if it does become a growth environment. So, we’d say to not abandon one in favour of the other.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Caroline Edwards of Putnam Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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Funds:
Pathways U.S. Equity – segregated fund
Canada Life U.S. Value Fund – mutual fund
Fonds:
Actions américaines Parcours – fonds distinct
Fonds de valeur américaine Canada Vie – fonds commun de placement