Equities Blog

Capturing the Growth Opportunity in an Uncertain World

20 October 2020

3 min read

James T. Tierney, Jr.| Chief Investment Officer—Concentrated US Growth

Portfolio Perspectives: In almost any macroeconomic environment, investors can find great businesses that can continue to deliver growth, but they are few and far between. Equity investors who know how to find them can benefit from shares that have tended to deliver consistent outperformance over time.

Our research shows that within the top 1,000 US companies, only 356 have produced earnings growth above 10% in a year on average over the last 40 years. Remarkably, only 22 firms on average managed to do it for five years straight, and these companies posted annualized excess returns of 2.1% versus the S&P 500 Index.*

In today's market, the key is to identify businesses with the potential to deliver consistent top line growth that translates into solid earnings growth—even amid COVID-19, a global recession, equity market volatility and trade tensions between the US and China.

How do we identify quality growth companies?

In our search for sources of consistent growth, several characteristics help point the way to businesses with staying power to support long-term investment returns.

Fund Focus

ES AllianceBernstein Concentrated US Equity Fund

Seeking Consistent Earnings Growth from High Quality US Companies to Drive Long-term Returns

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Dominant business positions
Dominant market positions often support sustainable growth. Wide competitive moats and high barriers to entry are key ingredients for a market-leading position. Yet it’s important to make sure a company’s products or services aren’t being competed away.

In a recession, strong companies tend to get stronger while the weak get weaker or disappear. The retail sector is a good example. As demand dries up, several weaker retail chains could fold, but their revenues will go to the survivors. So an earnings crunch can sometimes lead to a stronger and more profitable business in the years ahead for companies that make it through. In uncertain times, we look for the fittest companies that are likely to survive—or those that may become stronger—and should be able to deliver robust earnings through a recovery.
Innovation
In our rapidly changing world, continuous innovation is critical to success. Businesses with clear competitive advantages today may not prevail in the future without the ambition and ability to reinvent and evolve as market conditions change. Businesses that embrace change within their competitive environment and continually invest in their products and services are well positioned to fuel sales growth and deliver sustainable growth. Take, for example, Abbott Laboratories, a global healthcare company held in the Fund. Abbott has several franchises including diagnostic products, nutritional products, established pharmaceuticals and medical technologies. This creates diversified revenue exposure and a split between developed markets and emerging markets, which underpins the company's unique growth characteristics.
Strong management with good governance
A strong management team is fundamental to success. Even the best businesses can't thrive for long without the drive and vision of strong leadership. Perhaps the biggest test of leadership is to acknowledge the threatening forces at your doorstep and to drive forward change to keep ahead of the competition. For example, ESG standards are rapidly evolving, which requires a deep understanding on how future changes could affect the business environment. By embracing these changes within a business model, a company demonstrates progressive strategic thinking that can also help drive long-term performance. So, we focus on quality firms that hold and can maintain industry-leading market positions, while embracing change and maintaining strong financials through conservative accounting.
Sustainable pricing power
Pricing power is an important indicator of a company's ability to withstand disruptions and maintain or grow profit margins. And it is especially important today, when many disruptive forces are at play including trade concerns, inflation and slowing global economic growth. In addition, a growing focus on income inequality is likely to drive higher wage growth for lower paid workers. For businesses without the ability to maintain pricing power, these headwinds could lead to margin erosion over time. We look for businesses that have the capability to offset this pressure to improve the chances of sustainable earnings growth.
Capital discipline and financial resilience
Balance-sheet health and low earnings volatility is a great indicator of resilience particularly in times of stress. If interest rates rise over the long term, businesses with less debt to service, will face less of a penalty in their financing costs. So, we look for low debt ratios which are a good indicator of a business's flexibility to execute its strategy without relying on banks or credit markets. Just as important, businesses must demonstrate solid accounting practices and discipline, in order to generate the cash they need to fund and invest in their operations. In turn, this means they are less beholden to the demands of externally sourced capital and less vulnerable to a potential tightening of credit markets.

Few businesses consistently meet all these criteria. But applying these standards to a stock picking process is a successful formula, in our view. In-depth analysis and research are crucial to identify high-conviction opportunities with predictable and sustainable earnings growth. And maintaining a focused approach, including active engagement with all the businesses we invest in, means we can make the difficult decisions to choose the best companies with strong long-term upside potential in complex and volatile equity market conditions.

*US universe consists of the top 1,000 companies by market cap each year from 1979 through 2018 with annual rebalancing.
As of 31 December 2019.
Source: Center for Research in Security Prices, FactSet, S&P Compustat and AB

The value of an investment can go down as well as up and investors may not get back the full amount they invested.

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 and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

About the Authors

James T. Tierney, Jr.

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

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