SIMON BROWN: I’m talking now with Michele Santangelo, portfolio manager at Independent Securities. We’re talking growth stocks. Michele, I appreciate the early morning.
In a note you put out you made, I think, the really excellent line – I really enjoyed it – ‘From growth abundance to growth scarcity’. As recently as almost this time last year, it was just go, go, go. You’re now saying, hang on a second, we’ve actually completely switched that around.
MICHELE SANTANGELO: Yes, absolutely. Growth is a scarce commodity at the moment. I think that’s also what’s created so much opportunity now for quality growth shares. We’ve obviously seen valuations compressed quite nicely, and a lot of those quality growth companies that are a lot more resilient than some of the growth companies, just shot the lights out during Covid just to fall back 80%, 90%. So there are nice opportunities at the moment.
SIMON BROWN: You also made the point around structural growth versus perhaps momentum. Zoom is an example. Yes, we all Zoom now, but that really was a momentum story. Truthfully, I could Zoom, I could Teams, I could Google Meet – the list just goes on and on. What you really want to focus on are those companies with structural growth.
MICHELE SANTANGELO: Yes, absolutely. The structural growth companies are where you’re going to see long-term tailwinds supporting the growth of those companies. Momentum growth is typically very short term and, if you get it wrong, you can get it very wrong. Yes, there are a number of structural growth stories across the world, just in medical devices [and] biotechnology. Clean energy is very important now as well. So there are definitely a lot of structural tailwinds out there.
SIMON BROWN: Some of the examples you had in your note. Adobe – I’ve chatted around this stock before. I use their software and I remember having to shell out vast amounts of money to buy it as infrequently as possible. Now I just pay them every month. They’ve done that pivot to software as a service, and they’ve done it incredibly smoothly. It is a strong, compelling business model.
MICHELE SANTANGELO: Yes, it’s absolutely a wonderful company. It is one of the large caps that I do mention. But it still has a really good growth trajectory to it. As you said, you use it and anyone who has an online business in design, whether it’s designing videos or audio or visual effects, [is] going to be using Adobe’s product simply because it is really one of the best in the whole world.
SIMON BROWN: You mentioned it’s a large cap. Would your preference be to sort of look perhaps more in the midcap or even small cap [space]? Of course, when you’re talking US, small cap is relative. They are often fairly giant companies when you convert them in terms of their actual market cap. Are you relatively agnostic in terms of size?
MICHELE SANTANGELO: In the typical portfolio that we manage we would have a combination of those. So [those] would be majority large caps, but we do find quite a few small and midcap opportunities, and one of the examples might be Canada Goose. Canada Goose is the Canadian luxury apparel maker. I think their market cap is under $2 billion at the moment. In global standards that is a relatively small cap. That’s a company that we really like. We know that it’s growing really well globally. It’s expanding further into Asia, and the brand and the products are exceptionally well regarded. It was trading at quite a high valuation, but now at a forward price-to-earnings ratio of about 15 to next year it’s a very compelling story.
SIMON BROWN: You make the point [that] the one sector, cybersecurity, is recession-proof in that recession or not you need to keep your servers and everything else secure. Absolutely. But of course, again, prices will go everywhere, and in periods like this in the businesses which continue to generate profits and do well, suddenly we are seeing some decent valuations in that sector.
MICHELE SANTANGELO: Absolutely. I think with the cybersecurity sector you have to be invested in the companies that have the most technological superiority, because the hackers and the nefarious people trying to steal money from companies are becoming smarter and smarter, and you want to be with the companies that are ahead of the curve.
Maybe I can just give you an example, an analogy, with CrowdStrike. The typical cybersecurity firm would be an endpoint security firm, where they would just monitor any incursions into the network. But once someone’s in the network, they can pretty much do what they want, whereas CrowdStrike monitors anyone trying to get into the network, but then also monitors everyone inside the network as well. Definitely one to watch.
SIMON BROWN: Yes. And, if nothing else, we’re going to see more hacking attempts. We’re going to see more networks. We’re going to need more security.
Michele Santangelo, Independent Securities portfolio manager, I appreciate the early morning.