Growth is Where You Find It

U.S. Equities

Growth is Where You Find It

Investing in growth stocks outside the limits of traditional benchmarks has allowed ClearBridge PMs Margaret Vitrano and Evan Bauman to thrive in a crowded field.

JEFF SCHULZE:  A key differentiator for both your strategies has been owning stocks in areas that aren't considered traditional, or popular, growth sectors.   How do you gain technology exposure via names that aren't widely held compared to the benchmark?

EVAN BAUMAN:   We're not benchmark-centric. We've never owned Apple, Google, or Amazon.  That tells you how different we are from other growth managers.  By design, the goal has been to get right the names that we do own,  looking for durable businesses that generate a tremendous amount of cash. So, software and storage -- and even energy, which at times looks really interesting  because valuations can get so inexpensive.

It’s less about what sectors we own or what others might own, and more about finding areas of growth.  In principle, we'll go anywhere. We worry less about sector over- and under-weights, about certain relative exposures, and more about finding well-positioned, well-run, long-term-growth businesses where managements are really well trained in capital allocation. Today we have health care, media, tech, and energy – those are kind of the four key areas. But doesn't mean we can't find a stock in another sector.

I mean, we have a big exposure in the media space, especially in some of the programming assets, because they have pricing power and generate a tremendous amount of cash flow. And I think they're in an area that's going to go through a tremendous amount of consolidation the way you've seen in some of the distributors within the media space.

JEFF SCHULZE:  Margaret, continuing with this idea of nontraditional growth, what role does your cyclical exposure play?

MARGARET VITRANO: Well, there are a lot of different definitions of growth. And if you ask me what constitutes a growth stock, it can mean terrific, outsized revenue growth, [but] it can also mean a company going from earnings of less than two dollars a share to something 2 or 3 times that amount, that's still good growth to us, and I think that can really add value in a portfolio.

So, when we think about investing in a name, we're really asking ourselves, "When I look out several years, what does this company look like? What is the revenue growth? What is the earnings growth? What is the cash flow growth? And how different is it versus today?"

And I think having that kind of broad definition of growth has helped us do things like be overweight energy, which last year was a nice contributor, or be underweight consumer staples, where it's hard to see terrific growth in either the revenue or the free cash flow or the earnings. And valuations seem quite stretched -- so we think we can do better.

So, looking at it longer term and trying to have a relatively broad definition of growth has helped us to be a little bit different from the index, and hopefully add value by being different from the index.

JEFF SCHULZE:   If you look at the energy sector, it's been supported by stabilization here of oil in the $50 to $60 barrel range. And you've seen renewed signs of U.S. production and rig counts rising. Where are you both seeing opportunities in that space?

EVAN BAUMAN: So, again, it's specific companies. If you go back 12, 13 months, to  last January and February,  basically you could have thrown a dart and made money since that time, as long as the company stayed solvent, since you had, essentially, a margin call going on in the entire commodity space in January. We tested the lows in the market and in that sector in February.  

But you've had a tremendous rally since then. So, it's important as we've discussed earlier to focus on top-tier, quality assets, good management teams, and particularly in an industry like that, good balance sheets, to identify companies that can survive and in some cases, thrive through a downturn.

With pricing right around $50 a barrel, a lot of companies have fewer issues from a balance sheet perspective than they had a year ago. But the stock prices [of firms] across the border are up a lot as well. Some of the asset-heavy oil companies have had tremendous moves higher. So it's important what you pay for a cyclical industry like energy. You really, from this point, need oil prices to move sustainably higher over the longer term for a lot of those equities to work.

Where do the opportunities lie?  In the service space, I think you're starting to really now start to see the inflation trade kicking in. You've had about two and a half years of a tremendous amount of deferred capital expenditures because the market had been so weak for so long -- with $200 to $300 billion that haven't been spent in terms of infrastructure, in terms of investments like oil service and oil drilling companies, new equipment or retrofitting old equipment with new safety features.  

So, a big part of the market right now where we're seeing opportunity is in the service space, in the drilling space,  the equipment space where you have the potential for a pretty sizable move higher in some of these equities, simply because you have years' worth of investment that still has to be made.  So we've had a  bias toward energy for a long time. But I think it feels like this is a period where it's important to take profits in certain companies. But also, I think if you have a longer-term view, there's still a tremendous amount of opportunity iin certain business models within the energy service space.

MARGARET VITRANO: Evan, you took the words out of my mouth. Both of us are investing in energy, but that said, it’s not because either of us have any great insight as to where oil prices will be next week or next month. It's really about the longer term and thinking on a global basis, “what's the cost of extracting a barrel of oil from the ground?” And that price is higher than the current price. That doesn't mean the price is going go directly to that. It just means that unless we have a global economic slowdown, we should consistently march towards that over the next couple years.  

Top

IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.