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This episode, Stu Kedwell, Co-Head of North American Equities, shares his views on the evolving market landscape, particularly the recent growth-to-value shift. Stu also discusses the importance of considering both growth and value companies when investing, and the tools he uses to find potential opportunities. [5 minutes, 49 seconds] (Recorded April 27, 2021)

Transcript

Hello and welcome to The Download. I'm your host, Dave Richardson, and it is (S)Tuesdays — much more appropriately than the previous two weeks — on Tuesday. Stu, how are you doing?

Great. Thanks, Dave. Thanks for having me, as always.

Just from our little pre-chat before taping, this is about to become a very exciting and rewarding period of time for an investment manager like yourself. And really, it comes down to where we've seen the market evolve over the last few weeks. We did a lot of chatting and a couple of episodes of the podcast on this great rotation from growth to value, as interest rates yields were moving higher, and we saw some of that rotation happening, tech stocks pulled back. But then all, of a sudden, those rates stalled out and started drifting lower again. It's left us with what, Stu? How do you interpret this from your perch?

Well, the old saying is: Sometimes it's the stock market, and sometimes it's a market of stocks. I think that's what we're really evolving to in this environment, Dave. To your point, we had these two big levers on the desk of a portfolio manager. One lever was growth and one lever was value. When the vaccines came about, there was a real tug on one lever and a real push on the other, as a value started to really outperform last fall. Then it became the reopening stocks and what have you. What we've seen in the last six or eight weeks is pockets of both of those buckets, some stalling, and some starting to perform well. That's why I call it a bit more of a market of stocks rather than just these kinds of growth-value discussions or broad stock market discussions. We know on the headline that markets are a little bit expensive relative to their historical levels, although not unduly so relative to fixed income. So still not a bad risk premium. We know that central banks are likely to be on hold for some time. So, the thing that becomes very important for a portfolio manager in the ensuing months here is understanding whose earnings could be a little bit better than expected and whose earnings might be a little bit worse. There's no question there's high expectations, but just looking today, even, you have UPS doing better, up 10%, General Electric, maybe not quite as good, and off a couple percent. So, in both cases, maybe not bad businesses, but the market's starting to be a little bit more discerning around what's going to power forward. We're finding that, as I said, there's good stocks in the value basket, but there's also some good stocks in the growth basket. So, it's really nice for a portfolio manager because you can X those factors out, per say, and just find a collection of businesses that you think can do reasonably well in this environment.

Yes, for lack of a better description, that's when it's really fun, because what you're really good at and what you enjoy doing is all that digging and identifying the best companies and the best opportunities, not, as you say, just a binary decision of buy one type of stock, buy the other. There's going to be companies in both groups that are good. This is where you really earn your stripes.

There's a couple of tools that we've started to embrace. One is called Visible Alpha, which takes a company and it really details all the expectations, line by line, of their financial model. You get to see who's at the high and who's at the low, and where the average is. It's a great tool to have discussions with management or analysts around what might actually arrive. Another one, a new tool that we’re using, is called Canalyst, which has financial models on literally thousands of companies. So, you can marry these two tools together. You have businesses that you like, and if you can find them at times when the outcome might be a little bit better than expected and you feel like you have a good understanding of it because of Visible Alpha. Then when you go put some of those statistics into the model, you can see, well, this is how the earnings could be better. In a low interest rate environment, if you can have better earnings, you can also have slightly higher valuations, and you can get some big moves in some of those stocks. The counter can certainly be true. These are two tools that we’ve put on board in the last quarter that are going to be really valuable to our portfolio team in this environment.

Wow. I'm very familiar with Visible Alpha. My wife and doctor say I've got twenty pounds of visible alpha, so if you've got a tool to identify that… Because I think I actually look pretty svelte.

Well, you need to have the expectation in the right spot, Dave. That's the most important thing.

Well, that's great Stu, because I think, just from my perch as well, looking at it, the market has certainly evolved into what I agree is a more interesting place for stock pickers. And it's good for you to share the way you think about that, and then some of the tools you're using to be better than you've ever been in terms of making those selections. So thanks, Stu. Thanks, as always for your time.

Great. Thanks for having me, Dave. All the best to everyone.

Disclosure

Recorded: April 27, 2021

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