Thematic opportunities favour growth stocks

Some of the most promising investment themes in the current market present real opportunities for growth-oriented companies, says Richard Bodzy, portfolio manager with Putnam Investments.

“There are structural tailwinds in place in certain pockets of the growth universe that are long-dated, multi-year in nature and powerful,” he said.

Bodzy and his team apply a “top-down thematic lens,” focusing on areas that demonstrate consistent above-market potential. Specifically, they’re looking for companies with high-single-digit topline revenue growth and double-digit free cash flow growth.

Among their areas of interest are an explosion in screen time, the rise of artificial intelligence, personalized medicine, and the shift from 4G LTE to 5G telecommunications infrastructure.

Their approach is to invest primarily in companies that have become integral to an industry by providing key products and services that are less vulnerable to market swings.

These companies include:

• Switzerland-based Lonza Group AG, a large drug manufacturer that benefits from outsourcing production capabilities so biopharma companies can focus on internal drug development. As an outsource manufacturer, it does not face the same kind of binary FDA risk that a lot of other companies in the healthcare sector do, Bodzy said.
• Maine-based IDEXX Laboratories Inc., which sells consumables into veterinary practices.
• Mass.-based American Tower Corp., an infrastructure REIT where the major telecommunications companies of the world hang their equipment. It is poised to benefit from over $30 billion in infrastructure spending in the U.S. as the industry gears up for 5G communications.
• Netherlands-based Universal Music Group N.V., which collects royalties from the use of proprietary content on streaming services.
• Calif.-based Cadence Design Systems Inc., which produces hardware, software and silicon for the semiconductor manufacturing industry.
• Washington, D.C.-based CoStar Group Inc., a dominant commercial real estate provider of data, tools, listings and online marketplaces. Bodzy described CoStar as a mid- to high-teens top-line grower. “It has greater than 20% EBITDA margins, and should have near 20% earnings growth over the next couple of years,” he said.

According to Bodzy, the themes he’s following are especially good for tech companies on the rebound after a pendulum swing in investing strategies that favoured value names.

“We’re actually starting to see upside again to out-year consensus growth estimates for the stocks we own, and that’s an encouraging sign,” he said.

Tightening their belts

Another encouraging sign is the new approach taken by growth-oriented companies — large-cap tech stocks, specifically — to improve their balance sheets instead of chasing incremental revenue at any cost.

He pointed to Calif.-based Salesforce Inc., which recently achieved an all-time high 27% operating margin for fiscal 2024. “It was a full 400 basis points ahead of expectations,” he said.

“Similarly, Meta [Platforms Inc.] has already taken down their operating expense guidance for calendar 2023 by $6 billion, since it was initially forecast only a few months ago.”

Among the companies reducing headcount and salary expenses over the next 12 months are Google, Amazon, Microsoft, Zoom, Snapchat, Atlassian, Sirius Satellite Radio, Poshmark and Twilio.

“Cost management actions should help ensure margin integrity and profitable growth,” he said. “We absolutely believe the end result will be stronger bottom lines and operating marginal offsets to any potential hiccups in revenue.”

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