Many of the challenges plaguing financial markets are now priced into growth stocks, given spectacular drawdowns this year, says Greg McCullough, portfolio manager at Putnam Investments.
Speaking on the Soundbites podcast, McCullough said growing businesses seem to be coping well with economic headwinds such as rising interest rates, soaring inflation and the aftermath of war in Europe.
“We expect growing businesses with pricing power to be able to largely offset cost pressures, including labor inflation and rising costs. transportation,” he said. “Growth companies with a narrow range of operating and financial results that operate in oligopolistic markets with limited competition can really differentiate themselves in times like these.”
McCullough, who manages Putnam’s Canada Life U.S. All-Cap Growth Fund, said growing companies in sectors such as information technology, health care, industrials and consumer discretionary tend to be responsible for the vast majority of innovation in the economy.
“Growth companies that are scale market share leaders with pricing power should not only hold up well, but thrive in this environment,” he said, adding that when growth stocks straighten up, they tend to do so through large movements.
“We’re suggesting you have to be in the growth to win, long term,” he said. “We wouldn’t want investors to miss big moves higher in growth stocks, especially now, given the high degree of pessimism currently reflected in the market.”
McCullough said each stock has its own growth algorithm and different degrees of economic sensitivity. He seeks multi-year growth engines and companies with contract and recurring revenue, such as American Tower Corp., based in Massachusetts, Waste Connections, based in Texas, and UnitedHealth Group Inc., based in Minnesota.
“It increases our appetite to buy the decline in these stocks,” he said.
Other names he likes include California-based Dexcom Inc. and California-based Intuitive Surgical Inc., respective leaders in the continuous glucose monitoring and robotic surgery markets.
“We expect double-digit growth for both of these businesses for at least the next half-decade, given low levels of penetration in large secular-growth end markets,” he said.
Other healthcare holdings with attractive valuations include Ireland-based ICON plc and Washington, DC-based Danaher Inc.
“All of these businesses should be able to generate growth at above market rates with an attractive return profile over the next several years,” he said.
McCullough pointed out that growth has been easy to come by over the past 18 months, but the economic cycle is changing and it will be harder to find winners.
“As economic growth wanes over the next 18 months, we expect growth companies with secular tailwinds to perform well, relative to the broader market.”
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without the contribution of the sponsor.