Tom Ognar, portfolio manager with the Heritage Growth Team, explains how they’re finding growth opportunities in a rising market environment.
Laurie King: I’m Laurie King. And you are listening to On the Trading Desk®. The U.S. stock market has hit all-time highs, leaving growth stock investors wondering where opportunities might be found. Tom Ognar, portfolio manager with the Heritage Growth Equity team, has ideas about where to look. His team manages four growth strategies for Wells Fargo Asset Management. Tom, welcome.
Tom Ognar: Thanks Laurie, great to be here.
Laurie: Tom, you and your Heritage Growth Team have a couple significant milestones coming up.
Tom: Next year, 2018, will be our 25th year here as a team. In January, I’ll have my 20th year at the firm. And so we have a lot of history of looking for companies that display robust growth, sustainable growth, and trying to figure out where that growth is being underappreciated by the market. And valuation is very, very important to what we do as growth managers.
Laurie: Well congratulations on that. Turning to the equity market, there are concerns about a run-up in the market, particularly for growth stocks. Are you and your team concerned about the run-up?
Tom: It’s a question we get quite a bit lately. And 2017 has been a very good year to be a growth investor. But I also say, you have to look at the time period you’re picking. Let’s go back to the beginning of 2016 and look at it that way.
So from that perspective, we really feel like the S&P 500, which has gone from 16 times forward earnings at the beginning of 16 to 18 times forward earnings, really hasn’t been driven necessarily where the outsize valuation isn’t coming from the growth area. What’s really driving valuations, and why those stocks still look attractive today, is because they’re putting up superior revenue growth, putting up superior cash flow growth, they’re putting up superior earnings growth. Companies growing revenues in the 20-25% range, and driving cash flows and earnings at a similar rate during that period of time. That does wonderful things to valuations in really bringing them down or bringing the stock prices up.
Laurie: So take us back into your team, Tom, and tell us how you’re seeking out growth stocks for investors.
Tom: We’ve come up with what I think is a very catchy acronym we call SCODI to help explain to investors where we’re really seeing disruption creating opportunity.
Laurie: So let’s go through that acronym SCODI—the “S” stands for?
Tom: For software as a service. It’s moving things that we would normally have done on our desktop into a central depository where software can be updated, more security, and better interaction with that product. They’re very actually attractive business models because it’s a recurring revenue stream for that service.
Laurie: And the “C”?
Tom: Cloud computing, run by the most experienced and highest-end computing platforms in the world, being driven by companies like Amazon with their Amazon Web Services. Even things that impact our everyday lives. So Netflix, for instance. Every time we are going to watch something—that’s all being run by Amazon’s cloud computing power.
Laurie: How about the “O”?
Tom: Online retailing. And one of the biggest secular changes we’re seeing right now is really the amount of share gained by the online retailers. And it’s not just the younger generation that’s driving it; it’s also our parents who are now ordering frequently off of services like Amazon, that are helping drive that.
Laurie: And the “D”?
Tom: Digitization of currencies. You know, I challenge anyone to go by a college campus and see how much cash is actually being spent. But you see that everywhere—moves towards more online retailing, you’re almost forced to use digital currency. As a plus to that, the government likes us to use digital currency, because it’s much easier for them to track and tax digital currencies.
Laurie: And finally, what’s the “I”?
Tom: We take a little bit of license here, but there’s a term out there called the Internet of Things. And probably the biggest area we’re seeing beneficiaries of that trend is in the semiconductor industry. Semiconductors that go into our cars that we drive today have gone up two to three times over the last 10 years. And so we’re seeing lots of growth opportunities.
Laurie: Well Tom, in the brief time that remains, what’s your outlook for growth for the remainder of the year?
Tom: We really still feel very good about the growth universe. And so if we can find companies that can grow revenues 16-plus percent, companies that are able to grow earnings in that high teens rate, we think especially in this very low interest rate environment, you should want to own growth stocks in this environment, and we’re still finding, we think, very attractive opportunities.
Laurie: Tom, that is all the time we have, there’s more about Tom and the Heritage Growth Team at wellsfargoassetmanagement.com. But for now Tom, thanks for joining us.
Tom: Great, thank you Laurie.
Laurie: Until next time, I’m Laurie King; take care.
As of August 31, 2017 the Growth Fund held 5.42% Amazon and 0.22% Netflix, the Large Cap Growth Fund held 5.91% Amazon and 0.85% Netflix and the Premier Large Company Growth Fund held 5.88% Amazon and 0.91% Netflix. The Emerging Growth Fund did not hold any shares of Amazon or Netflix. Portfolio holdings are subject to change and may have changed since the date specified. The holdings listed should not be considered recommendations to purchase or sell a particular security.