Equities Blog

Resilient Recovery Stocks Transcend the Growth-Value Divide

Apr 13, 2021
3 min read
A long, narrow footbridge traverses a lush green chasm, with an extreme downward slope from each end to its center.
Dev Chakrabarti| Chief Investment Officer—Concentrated Global Growth
James T. Tierney, Jr.| Chief Investment Officer—Concentrated US Growth

Investors are reassessing which types of companies will thrive in the next stage of the recovery amid the recent rebound of value stocks. But we think the distinguishing performance factor will be a company’s ability to generate sustainable earnings, regardless of its style classification.

Value stocks have rebounded recently, driven by hopes that an exit from the pandemic will buoy the global economy. The gap between value and growth was especially pronounced in US markets. Sectors such as financials and energy, which are more cyclically sensitive, tend to do well in economic recoveries and are more heavily represented in value benchmarks. Growth stocks, meanwhile, may face pressure from rising interest rates, which tend to affect their multiples more than those of their value peers.

The growth-value debate will rage on. But we think there’s a more important question that transcends traditional style definitions, considering how different post-COVID-19 normalization may look from past recoveries. In fact, we believe investors should widen the lens beyond a growth-versus-value assessment to determine a company’s true potential.

Three Signs of Strong Recovery Potential 

In our view, the key question is whether the quality a company offers comes at a reasonable cost. And in the aftermath of an unprecedented economic crisis, determining quality will now come down to how fast a company can recover its earnings as conditions improve. To identify such companies, we believe investors should look for three key growth drivers that are very specific to today’s conditions:

  1. The reopening trade: Companies that are most likely to benefit from economies opening back up will be the most obvious growth driver in 2021. But the recovery path won’t be the usual slog. Strong pent-up business and consumer demand for goods will accelerate the turnaround once lockdowns are fully removed, which will play out in the markets rather swiftly. On one hand, many companies will find it easy to post strong earnings growth against last year’s depressed levels, especially in retail and travel, which suffered the most in 2020. On the other hand, it will be easy to identify companies that are struggling to keep up the growth momentum they may have inherited from the pandemic’s demand spike for certain services.

  2. Changed behaviors: Consumers do a lot of things differently than they did 12 months ago—more online shopping, use of credit and debit cards over cash, and how they watch their favorite movies and TV shows. Many of these changes will persist. The UK, for instance, recently more than doubled the contactless credit card payment limit to GBP100 (Display left). For businesses, working from home and less employee travel has reduced expenses and helped push up margins. Business equipment rentals, which usually take a hit in recessions, held steady through the pandemic (Display right). All told, this could mean 2020 winners will keep winning, while some companies that are expecting a “return to normal” may never realize it.

    Old (And New) Habits Are Hard to Break
    The UK contactless payment limit doubled in two years, and revenues for a leading equipment leasing firm held near $5 billion.

    Left display through March 2021; right display through January 2021
    Source: Ashtead, MoneySavingExpert.com and AllianceBernstein (AB)

  3. Margin expansion: Profitability growth will be critical now, especially when so many companies were forgiven for margin compression in 2020. If moderate inflation returns, as expected, the test will be even harder in 2021 compared to pre-crisis expectations. Companies may grow; but if their margins still shrink, the market will penalize them. Pricing power will be ever more essential, so companies with differentiated or highly desirable products and services that are in short supply should do well.

 

With the global economy on the mend, investors will continue to reassess the relative advantages of value and growth stocks alike. But their assessments are happening amid high price/earnings multiples not seen since the late 1990s, which is raising the market’s overall risk profile. That’s why high-quality companies with reasonable price/earnings and transparent earnings streams should have the advantage. Simplistically focusing on either value or growth likely misses the bigger picture: companies with resilient business models amid changing market and macroeconomic conditions should be able to deliver solid returns in a post-pandemic world, no matter what style benchmark their stock belongs to.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Dev Chakrabarti is a Senior Vice President and Chief Investment Officer for Concentrated Global Growth. Prior to joining AB in December 2013, he was a portfolio manager/analyst on the global equity research and portfolio-management team at WPS Advisors. Chakrabarti joined W.P. Stewart in 2005 as a member of the European equity research and portfolio-management team and moved to New York in 2008 to focus on global portfolios. Earlier in his career, he worked as an M&A analyst at Merrill Lynch, a financial analyst at Unilever and an equity analyst at J.P. Morgan Securities, where he specialized in European technology stocks. Chakrabarti holds a BSc (Hons) in economics from the University of Bristol and an MSc in finance from London Business School. Location: London

James T. Tierney, Jr. is Chief Investment Officer of Concentrated US Growth. Prior to joining AB in December 2013, he was CIO at W.P. Stewart & Co. Tierney began his career in 1988 in equity research at J.P. Morgan Investment Management, where he analyzed entertainment, healthcare and finance companies. He left J.P. Morgan in 1990 to pursue an MBA and returned in 1992 as a senior analyst covering energy, transportation, media and entertainment. Tierney joined W.P. Stewart in 2000. He holds a BS in finance from Providence College and an MBA from Columbia Business School at Columbia University. Location: New York