Growth stocks coping well with market challenges

Many of the challenges besetting financial markets are now priced into growth stocks, given the dramatic drawdowns this year, says Greg McCullough, a portfolio manager with Putnam Investments.

Speaking on the Soundbites podcast, McCullough said growth companies appear to be coping well with economic headwinds such as rising interest rates, ballooning inflation, and the consequences of war in Europe.

“Our expectation is that growth companies with pricing power will be able to largely offset cost pressures, including labour inflation and rising freight costs,” he said. “Growth companies with a narrow range of operational and financial outcomes that operate in oligopoly markets with limited competition can really differentiate themselves in periods such as these.”

McCullough, who manages Putnam’s Canada Life U.S. All Cap Growth Fund, said growth companies in sectors such as IT, health care, industrials and consumer discretionary tend to be responsible for the vast majority of innovation in the economy.

“Growth companies that are scaled market share leaders with pricing power should not only hold up well but thrive in this environment,” he said, adding that when growth stocks recover, they tend to do so through big moves.

“We would suggest you have to be present in growth to win, over the long term,” he said. “We wouldn’t want investors to miss big moves higher in growth stocks, particularly now, given the high degree of pessimism currently reflected in the market.”

Buying on the dip

McCullough said every stock has its own growth algorithm and differing degrees of economic sensitivity. He looks for multi-year growth drivers and companies with contractual, recurring revenues, such as Mass.-based American Tower Corp., Texas-based Waste Connections and Minn.-based UnitedHealth Group Inc.

“This increases our appetite to buy the dip on these stocks,” he said.

Among other names he likes are Calif.-based Dexcom Inc., and Calif.-based Intuitive Surgical Inc. — respective leaders in the continuous glucose monitoring and robotic surgery markets.

“We anticipate double-digit growth for both of these businesses for at least the next half decade, given low levels of penetration in large, secularly growing end-markets,” he said.

Other holdings in healthcare with attractive valuations include Ireland-based ICON plc and Washington, D.C.-based Danaher Inc.

“All of these businesses should be able to compound growth at above market rates with an attractive return profile over the next several years,” he said.

McCullough pointed out that growth was easy to find over the past 18 months, but the business cycle is changing and finding winners will be tougher.

“As economic growth becomes more scarce over the next 18 months, we would expect growth businesses with secular tailwinds to perform well, relative to the broader market.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.