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Growth or Value? 6 stocks that show you can have both

Lewis Jackson  |  26 Mar 2021Text size  Decrease  Increase  |  
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Investors building a portfolio today are often asked to choose between Growth or Value. That’s the wrong question to be asking, according to Scott Berg, portfolio manager of T. Rowe Price’s Gold Rated Global Equity Fund (14479)

Instead, consider diversification, Berg’s preferred risk-management tool. Where a 2008 study found that the average mutual fund manager owned a portfolio of 90 stocks, Berg’s fund holds between 150 to 200.

“There are a group of people who are just investing in energy, cyclicals, financials, and the old economy,” says Berg, who won Morningstar’s 2021 Global Equities Fund Manager of the Year.

“They’d never consider Tesla or Amazon. On the other side, there are people who only believe in innovation or disruption and they’d never consider energy, cyclicals, and financials.

“The whole art of portfolio management is going beyond that.”

T. Rowe Price Global Equity Fund has delivered 28.18 per cent (net of fees) for the 12 months ending 28 February.

Morningstar likes that the fund crosses so many borders. Berg supplements giants such as Amazon (AMZN) with meaningful holdings in emerging markets. While the portfolio tilts to growth, value stocks also find a home. For Morningstar analyst Christopher Franz, the fund’s broad bottom-up research that makes this variety possible.

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“Berg travels extensively, spending roughly 50 per cent of his time on the road to meet with company management, suppliers, and competitors to ask questions about market and business conditions, strategy,” Franz says.

To illustrate the importance of diversification, Berg outlined six very different companies – a mix of old and new industries – which the fund has bought and sold. They encompass southeast Asian ecommerce and entertainment and more stalwart industrial powerhouses such as General Electric (GE) and Boeing (BA).

We outline the six names Berg singled out and look at Morningstar’s corresponding valuations.

Etsy (ETSY)

Covid-19 has helped some firms. Etsy is an American retailer of handmade goods, vintage items, and crafted goods. The business model is based on sellers listing products on Etsy's platform. Speaking about Etsy and others, Berg says:

“They were business models that weren’t proved pre-Covid, that suddenly got absolutely turbo-charged in terms of their scale, margin, and outlook.”

Etsy, which is outside Morningstar coverage, closed 25 March at US$196.20.

General Electric (GE)

Tech companies might have hogged the headlines since covid, but there is still value in stocks that might seem old-fashioned according to Berg:

“When we find average companies at average prices we’re willing to have bits of that.”

GE’s roots go back to Thomas Edison and his light bulb. Today, GE is a global leader in air travel, precision health, and the energy transition. Its industrial base includes aerospace engines, gas and steam turbines, onshore and offshore wind turbines, as well as medical diagnostic and mobile equipment.

Narrow moat GE closed at US$ 12.85, below Morningstar’s fair value estimate of $14.10. At three stars, Morningstar’s analyst Joshua Aguilar thinks CEO Larry Culp is engineering a successful turnaround of GE that the market has yet to fully appreciate.

Brookfield Asset Management (BAM.A)

The post Global Financial Crisis era of low interest rates has hurt financial stocks. The covid economic downturn means central banks are likely to continue keeping interest rates “low for longer.”

Underperformance of global financial stocks relative to global equityUnderperformance of global financial stocks relative to global equitySource: Morningstar

Berg thinks there are still opportunities if investors look beyond traditional large banks. Blue-chip alternative asset managers like Brookfield Asset Management benefit from low rates, and have little credit exposure.

Brookfield owns and manages commercial property, power, and infrastructure assets. Its investment focus includes Real Estate, Infrastructure, Renewable Power and Private Equity.

Outside Morningstar’s coverage, it closed 25 March at C$57.26.

Tesla (TSLA)

Kenny Rogers isn’t the only one who knows when to fold ‘em. A long time Tesla fan, Berg believes you must be willing to exit stocks you love once the price gets too extreme. Despite having sold 90 per cent of the fund’s Tesla position, he remains bullish about electric vehicles. The fund has invested in electric vehicle start-up Rivian, one of several emerging EV players breaking into the market.

Morningstar analyst David Whiston shares Berg’s concerns about narrow moat Tesla’s price, which closed 25 March US$640.39, nearly double the fair value estimate of US$349. The bull case rests on CEO Elon Musk’s commitment to sell 20 million vehicles a year in the late 2020s—about twice the number Toyota and Volkswagen make today.

“It is important to keep the hype about Tesla in perspective relative to the firm's limited, though now growing, production capacity,” says Whiston.

Sea Ltd (SE)

Covid-19 has not slowed down Sea Ltd’s momentum. It’s even outpaced Tesla. The company operates three segments, Digital entertainment, E-commerce, and Digital financial services, in growth markets across South East Asia. Its Garena platform is widely used by the region’s gamers and is the global leader in eSports. Listed on the NYSE in 2018, it returned 394.90 per cent in 2020.

“Sea is the single best performing large cap stock in the world for the last two years, it’s meaningful outperformed even Tesla,” says Berg, a long-time Tesla bull.

Sea Ltd, which is outside Morningstar coverage, closed 25 March at US$202.61.

Boeing (BA)

Berg has dropped troubled aircraft manufacturer Boeing, although not due to high valuations. Wide moat Boeing closed 25 March at US$247.19, just under Morningstar’s fair value estimate of US$257.

“I went into covid owning Boeing, Airbus, Rolls Royce, the trifecta of airplane and engine manufacturing. These are examples of companies that went down a lot and we sold. The industry has changed, the dynamics have changed post Covid,” says Berg.

For Morningstar analyst Burkett Huey, Boeing’s wide moat means it’s more than likely to achieve excess returns over the next 20 years. Put simply, building aircraft is difficult, expensive, and highly regulated. Boeing employs 1,500 people just to ensure regulatory compliance. The same goes for Boeing’s profitable defence business—Boeing has built US presidential aircraft since Franklin D. Roosevelt.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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