Entry Points | Valuation Discipline, Risk and Pricing

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Portfolio Analyst Brandon Smith, CFA, CAIA, highlights the importance of adhering to a valuation discipline and the risks associated with investing in statistically expensive companies.

Catalysts in Play: Are today’s highly valued growth stocks vulnerable?

We have just emerged from a decade in which investors enjoyed historically high rates of return with low inflation. We believe these returns were primarily driven by multiple expansion as central banks experimented with zero interest-rate policies. Growth equities, in particular, saw multiples rise to valuation levels not seen since the dotcom era of the early 2000s.

Today, we are in a dramatically different market environment.

Entry Points: Inflation, though it may have peaked, remains uncomfortably high. Central banks have rapidly tightened their monetary policies, and risk is seemingly being priced once again by the open market instead of the U.S. Federal Reserve.

Multiple Compression | We believe we are in the early innings of multiple compression across a wide swath of equities. Therefore, it may be an important time to remind investors that a great company does not necessarily equal a great investment.

  • One such example is Microsoft Corp. during the dotcom era of the early 2000s. This is a period that has many similarities to today’s market environment.
  • From January 2000 through December 2011, Microsoft sales more than tripled, and operating income, or EBIT (earnings before income and tax), more than doubled. But, the market capitalization of the stock was reduced by more than half, dropping to $218 billion from $476 billion.
  • Microsoft’s price-to-earnings (PE) multiple went from 53 times earnings to nine times earnings over this 12-year period, and the cumulative stock price return for Microsoft was negative 55.5 percent.
  • Why did the stock perform so poorly? We believe this is because investors paid too much for it in 2000. While Microsoft was a great company that continued to grow, investors experienced a poor return because they overpaid for it.

Today’s Environment | We hold that market indices are populated with many similarly expensive stocks. That is why we firmly adhere to the valuation discipline outlined in our three-circle stock selection process. And by doing so, we remain optimistic about the prospects for continued outperformance of low-valuation stocks in the coming years.

Active Strategy: Boston Partners’ strategies offer specialized actively managed value equity investing across a variety of geographies, market capitalizations, and long/short approaches. The construction of our portfolios is guided by a sensible set of fundamental truths that have been tested over time and various market cycles.

For questions or additional information, please contact us.

Disclosures:

Boston Partners Global Investors, Inc. (“Boston Partners”) is an Investment Adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill or training. Boston Partners is an indirect, wholly owned subsidiary of ORIX Corporation of Japan (“ORIX”). Boston Partners updated its firm description as of November 2018 to reflect changes in its divisional structure. Boston Partners is comprised of two divisions, Boston Partners and Weiss, Peck & Greer Partners (“WPG”).

The views expressed reflect those of Boston Partners as of November 2, 2022. Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views. Discussions of market returns and trends are not intended to be a forecast of future events or returns.

Estimates reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

Risk:
Foreign investors may have taxes withheld. Investing involves risk including the risk of loss of principal. Value investing involves buying the stocks of companies that are out of favor or are undervalued. This may adversely affect an account’s value and return. Stock values fluctuate in response to issuer, political, regulatory, market or economic developments. The value of small and mid-capitalization securities may be more volatile than those of larger issuers, but larger issuers could fall out of favor. Investments in foreign issuers may be more volatile than in the U.S. market, and international investing is subject to special risks including, but not limited to, currency risk associated with non – U.S. dollar denominated securities, which may be affected by fluctuations in currency exchange rates, political, social or economic instability, and differences in taxation, auditing and other financial practices. Investments in emerging markets may increase risks.

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Jack Birmingham

Product Specialist

4 Years of Investment Experience

4 Years at Boston Partners

Mr. Birmingham holds a B.A. degree in Political Science from Hobart College.

Mr. Birmingham is a Product Specialist for the Boston Partners Value Equity strategies based in the Boston office, responsible for clients, consultants and prospects outside of North America. Prior to this role, Mr. Birmingham joined the firm as an RFP Writer and Database Coordinator in the Marketing Department, where he supported all of the firm’s equity strategies.

Matthew Donovan

Equity Analyst

Mr. Donovan holds a B.A. in Economics from the University of Pennsylvania.

Mr. Donovan is an equity analyst with Boston Partners. Mr. Donovan is focusing his analytical efforts on Emerging Markets equities. Prior to this, he was a Research Analyst for the Boston Partners Sustainability and Engagement Team. He was responsible for original ESG/Sustainability research on companies held in Boston Partners’ portfolios. Mr. Donovan holds a B.A. in Economics from the University of Pennsylvania. He has one year of experience.

John Zhao

Equity Analyst

Mr. Zhao holds a Bachelor of Arts degree from the Richard Ivey School of Business at Western University and an MBA from Harvard Business School. He has six years of industry experience.

Mr. Zhao is an emerging markets industry analyst with Boston Partners specializing in fundamental research of stocks held in our Emerging Markets Equity products. Prior to his role at Boston Partners, Mr. Zhao worked as a Private Equity Associate in Salt Lake City and an Investment Banking Associate in Hong Kong.

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Jonah Frank

Equity Analyst

Mr. Frank was a student at Boston University where he earned a B.S. degree in business administration with a concentration in finance and management information systems.

Mr. Frank is an equity research analyst with Boston Partners. Mr. Frank is focusing his analytical efforts on equities within a variety of cyclical industries.

Edward Stansky

Equity Analyst

Mr. Stansky holds a B.S. degree in economics from Duke University and a M.B.A. from NYU’s Stern School of Business. He has six years of investment experience.

Mr. Stansky is an equity research analyst with Boston Partners and has generalist coverage responsibilities. Prior to this role, he worked as a high yield and leveraged loan analyst at DDJ Capital and as an investment banking analyst in debt advisory at BofA Merrill Lynch.

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Marlon Thompson

Equity Trading Assistant

Mr. Thompson holds a B.S. degree in finance from Boston College. He has ten years of industry experience.

Mr. Thompson is an equity trading assistant for Boston Partners. Prior to assuming this role, he worked as a portfolio operations analyst. Before joining the firm, Mr. Thompson held several roles including Vice President of Operations at Benefit Street Partners LLC and positions at International Fund Services (IFS) and Pioneer Investments.

Kara Pattipati, CFA

Relationship Manager

Ms. Pattipati holds an M.A. in International Relations from the University of St. Andrews. She holds the Chartered Financial Analyst® designation. Ms. Pattipati has ten years of industry experience.

Ms. Pattipati is a member of the Relationship Management team at Boston Partners. She works with many of our key domestic and international clients in a client service and relationship manager capacity. Prior to joining Boston Partners in 2016, she was a business development associate at Geode Capital Management.

Elizabeth Sheerin

Relationship Manager

Ms. Sheerin holds a B.S. degree in business management from Babson College. Ms. Sheerin has thirteen years of industry experience

Ms. Sheerin is a member of the Relationship Management team at Boston Partners and she joined this team in 2011.  She works with many of our key domestic and international clients in a client service and relationship manager capacity. Prior to joining our firm, she was a Client Service Representative at Putnam Investments. She also held several financial services related internships including working for Merrill Lynch Global Wealth Management and State Street Global Advisors.

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