Value stocks have outperformed growth stocks so far this year, after a decade of lag, and the new trend may continue, says Charlie Bobrinskoy, vice president of Ariel Investments and portfolio manager of his Ariel fund. Focus. (ARFFX) – Get the Ariel Focus fund investment report.
Ariel believes in “classic Warren Buffett-style value investing,” he said in an interview with TheStreet.com.
Ariel likes high-quality companies with short-term issues that have depressed stock prices. The company had $18 billion in assets under management as of December 31.
“The stock has a chance to restore its historic outperformance of the past 100 years,” Bobrinskoy said. “There are a lot of high value stocks to buy today.”
Inflation will remain high, continuing to drive up interest rates, he said. One of the main reasons growth stocks have outperformed value in recent years has been low interest rates.
They have made the stream of earnings from growth stocks, which often does not come quickly, more valuable. Indeed, the return on risk-free assets such as treasury bills was low.
But with rising interest rates, growth stocks no longer have that advantage, creating opportunities for value stocks.
“As inflation soars, interest rates will rise much more,” Bobrinskoy said. “The current earnings of our companies will become more valuable than growth stocks.”
Actions that fit the bill
With inflation and rising interest rates, “you’ll want companies with real assets and current cash flows,” he said.
Ariel Focus Fund’s two largest holdings fit this bill: PAA (PAA) – Get the APA Corp report.an oil producer, and Mosaic (MOS) – Get Mosaic Company Reportwho makes fertilizer.
“Real assets in the ground increase in times of inflation,” Bobrinskoy said. It’s no wonder, then, that both of these stocks have risen in recent months.
Focus Fund also owns some financial services companies, which tend to profit from rising interest rates and trade at low valuations. Higher rates help banks because deposit rates generally rise more slowly than lending and investment rates.
Scroll to continue
A financial contribution from the Focus Fund is Northern Trust (NTRS) – Get the Northern Trust Corporation report. The bank serves more than half of the Forbes 400, does very well when interest rates rise and trades at 13.5 times forward earnings, Bobrinskoy said.
lazard (LAZ) – Get the Class A report from Lazard Ltd, a boutique investment bank, is another Focus Fund financial stock. It trades at 6.8 times forward earnings and plans to change its corporate structure to boost the stock, Bobrinskoy said.
Carveouts and spinoffs
Another theme for the Focus Fund is carveouts and spillovers.
Resideo Technologies (REZI) – Get the report from Resideo Technologies, Inc. is a thermostat company spun off from Honeywell (HON) – Get the report from Honeywell International Inc..
“We like spinoffs because management is buried in conglomerates,” Bobrinskoy said. “They’re not getting the attention and capital they deserve. Now they can allocate capital in the most efficient way.
Resideo is trading at 12 times forward earnings.
Nielsen (NLSN) – Get the Nielsen Holdings Plc reportthe media audience measurement company, is also part of Focus Fund.
“This one is very controversial. We like to buy what others don’t buy,” Bobrinskoy said. The bearish case for the stock is that people are watching less TV, given the cord-cutting and streaming trend.
“But we think the world isn’t giving up on advertising and someone has to measure it,” he said. Nielsen has new technology that can determine whether ads are running in different types of media.
“We think it will be well received,” Bobrinskoy said.
Last week, Nielsen rejected a takeover bid from a consortium including activist investor Elliott Management.
“We believe a deal will eventually be done, but otherwise Nielsen has an attractive valuation at 11 times forward earnings,” Bobrinskoy said.
The Focus All-Cap fund, with assets of $74 million, has generated a total return of 3.74% year-to-date through March 23 and 9.67% annualized over the past five years . That compares to minus 6.19% and 15.77% for the S&P 500.
