Dan thanks so much for being on Wall Street week.
First of all let's get your sense of how turbulent a time is.
Are we headed to a recession or not. We do think we're headed towards
recession at this point. Yes.
How bad. How long.
Well you know recessions are of course very feared events.
One of the interesting things about the stock market is it did a great predictor
of recessions and typically stocks peak eight to 10 months ahead of a recession.
Stocks peaked at the end of December early January this year.
So although Nyberg hasn't officially declared a recession the stock market is
saying we're probably in recession now as we speak.
So Dan one of the things that we've seen a lot of in the moving of funds as well
as people talking about it is as we go into these turbulent times few are
saying that's the time you want to go into value.
You don't want to be in growth. And in fact if you look at some of the
big funds they've lost a fair amount. The growth funds have lost a fair
amount. What does history tell us about when you
go into recession where you want to be. Yes a really important point.
I mean history there are patterns that you can invest in even in turbulent
times even through recessions are very important.
I understand that because essentially it's about having a game plan you know
during economic volatility and recession.
And what the history tells us actually is that as we enter into recession
growth stocks in other words companies with strong business models a low debt
operating margins that are higher than average they tend to do better than say
a highly leveraged companies companies with lots of operating leverage under a
fixed cost structure. And of course companies that weren't
growing particularly well before you know that only tend to grow with with
economic growth. And so what we we have seen in the past
historically is that as we enter into recessions value companies value stocks
tend to have significant earnings compression also declines in earnings
while growth stocks actually tend to hold up fairly well.
Now the other part of history that's important to note is
the first stage of a market correction is really valuation compression.
And we've seen that across the board. And it is also classically true that
growth stocks compressed more than value stocks.
But I think we would actually see a lot of signs that that part of this market
cycle is already over. The next part is really about the
economic recession and the decline in earnings that it will bring you know
across the market. And that's where actually growth stocks
start to shine. So I think it's important in what you
said there. It's not all the companies that are
considered growth companies. You have a subset that you really focus
on. Yeah I mean it's really interesting.
You're all just philosophy is focused on fundamentally the disruptors and the
innovators across industries as well as a category called Lifecycle Change which
is sort of companies that may have experienced tough times that we think
are about to experience better times because of innovation or management and
leadership. We have some interesting history from
top growers in particular. If you look at the top 75 companies
across the largest 750 of the top 10 percent of growers.
Their valuation actually is compressed so much relative to the market now
they're actually at multi decade lows. And that again gives us some
confirmation that it's really probably time to start thinking about not so much
the start of the recession which as I said probably has started already.
But what it looks like coming out of recession and into recession and that's
where again these kind of growth stock leaders the valuations have compressed
the fundamentals are likely to hold up better than an average and certainly
better than values. Difficult.
And we think it's a good time for long term investors to think about the
opportunities there. So sit down.
Let's go a little more specific. It could be because we want to try to
help investors make some good investment decisions here.
What specifically would you be looking at right now and those growth companies
you describe. Sure.
So I think one thing you look for is one of the strongest trends in business and
in society in the world. And one of them.
And so and then of course the companies that are leading that right the
disruptors the ones that are taking market share digital transformation of
business is sort of where machine learning big data cloud computing all
come together. Right.
This is all about making businesses more efficient efficient in their cost
structure and efficient in how they manage their
employees getting more productivity. And of course efficient in reaching and
servicing their clients. And so you know when you think about the
center of that that's really software. That's what's driving it.
And then of course the powering of that is semiconductors and hardware.
But think about company is we think like companies like VEBA which focuses on the
health care industry and making everything from clinical trials to
product recalls more efficient you know vast amounts of data to help improve
clinical trials results to target medicine but also lots of data to make
sure that if there is a recall you know they know exactly
why there's a problem and how do we call it and do you know who has it on.
It's companies that are you know also for example of course transforming
every business by moving to the cloud and helping them do that.
So every business needs a lot of software companies like Data Dog.
They do application performance monitoring on the cloud.
That means you know if you have 100 applications running across your company
that may be payroll that may be marketing that may be customer service.
Of course maybe you're manufacturing or court for service capabilities all those
applications you need to monitor them for their performance.
The downtime the accuracy and data for example the company that
provides software that helps you do that basically manage your digital
infrastructure. So data transformation is incredibly
important because particularly in a recession or in difficult times the most
important thing businesses want to do is get more efficiency out of more you know
more limited resources. Right.
Maximize their efficiency. So when you talk about lifecycle changes
it strikes me that one of the places we're seeing a huge change right now is
in energy as you go towards renewables. And we also try to get more efficient
our fossil fuels. What sorts of opportunities do you see
there if any. That's absolutely correct David.
I mean we have liked the renewable sectors solar wind these you know
battery technology to grant power electric cars as well as backup power
for a long time. But given the Ukrainian Russian war the
effect on oil natural gas and other prices on the traditional energy
industry which had been in a bear market is now poised for a transformation what
we call life cycle change a growth renaissance.
And the reasons are very clear. America is fortunately now a world
leading energy producer across many fields not just renewables but the
traditional oil and gas and you know liquid natural gas for example.
We are a leading producer. Companies in the US are important in
producing natural gas but for example the processes and logistics to to ship
natural gas leak in the liquid form across the globe.
So we're very excited about the opportunities in that area as well as
the renewables area. One more that applies perhaps to all the
growth companies in general. I think growth of this is if you look at
the lifecycle of their earnings more of them are out in the out years as
interest rates go up. That means there's a steeper discount
back to present value. Does that warn you away from some growth
companies because the interstates look like they're going to keep going up for
a while. So that.
That's that's absolutely correct. It's what we've seen already.
I think the valuation correction for the fastest grower because yes there there
are the opportunity for growth stocks is what they do 3 5 10 years from now in
terms of revenues earnings and cash flow.
But as interest rates go up those cash flows there's future opportunities get
discounted. Investors of course become very fearful
and tend to focus on the near term. But by many measures in particular in
the large cap sector the valuation pressure is already gotten to the point
where large capital stocks are actually
relatively cheaper than they have been in decades.
Against the market. And so we think it's an opportunity to
start you know picking picking the best of
those those growth stocks for. For of course the inevitable market
recovery.