A top-performing hedge-fund manager argues that growth stocks remain the best place for investors despite the recent pullback in the sector amid a revival in value-oriented issues.
“Investors should own a concentrated portfolio of high-quality businesses that can deliver strong organic growth even if the economy falters,” says Dev Kantesaria, portfolio manager and founder of Valley Forge Capital Management, which has about $500 million in assets under management.
Kantesaria’s hedge fund, Valley Forge Capital, was up 44.4% year-to-date through the end of August, according to BarclayHedge/Prequin.
The 12-year-old Valley Forge owns a concentrated portfolio of growth stocks that include Fair Isaac (FICO), Moody’s (MCO), Visa (V), and Intuit (INTU). These are all up strongly this year, but have fallen lately as growth and momentum stocks retreat. The firm is based outside Philadelphia.
Kantesaria’s view is that U.S. interest rates will remain low for an extended period of time and that growth stocks are the best place to be. “U.S. equities offer the best risk/reward opportunity among all asset classes globally,” he says.
He adds that stocks with price/earnings ratios of 25 – and earnings yields of 4% -- stack up well against the 10-year Treasury note, which yields just 1.73%. “You cannot keep up with inflation if you buy the 10-year Treasury,” he says. Inflation is running between 1.5% and 2% and taxable investors in higher tax brackets have to pay about a third of their Treasury income in federal taxes.
Kantesaria says the companies in the Valley Forge portfolio tend to have wide moats around their business. Visa and rival Mastercard (MA) dominate the payments industry. Moody’s and S&P Global (SPGI) are leaders in the credit-rating business, while Fair Isaac is famous for its FICO credit scores and Intuit has transformed its TurboTax income-tax guides into a lucrative subscription-software business.
None of these stocks is cheap, however. Visa has a price/earnings ratio of 33 based on projected current-year earnings; Fair Isaac, 45; Moody’s, 26; and Intuit, 35. “Valuations are appropriate given the quality of their businesses,” he says.
Kantesaria doesn’t own FAANG stocks such as Alphabet (GOOGL) and Facebook (FB), but he does own some Amazon.com (AMZN) stock. He isn’t thrilled with the capital-allocation policies of FAANG stocks, noting heavy capital expenditures at Alphabet. Facebook, Amazon, and Alphabet don’t pay dividends. Amazon doesn’t repurchase stock. Facebook buybacks are running at an annual rate of less than 1% of its market value and Alphabet buys back about 1.5% of its shares a yearly, barely exceeding its stock-based compensation.
“Companies that can deliver predictable and growing earnings will be prized assets,” he says.
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