Morgan Stanley’s Slimmon warns against buying a drop in growth stocks
(Bloomberg) — Investors should avoid the temptation to buy the pricey high-growth stock declines because “once the fever subsides, it lasts a long time,” according to Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management. .
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Slimmon joined the “What Goes Up” podcast to discuss what he’s investing in these days. He also explains how the MSIF US Core Portfolio fund he co-manages beat the S&P 500 with a 36% gain in 2021. Below are condensed and slightly edited highlights from the conversation. Click here to listen to the full show and subscribe on Apple Podcasts, Spotify or wherever you listen.
Q. You wrote to us before the show, saying “avoid the temptation to step in and buy into the high-growth stock sell-off.” You said, “my experience is this: once the fever is gone, it’s gone for quite a while.” Historically, is there a precedent that you could cite? Is it too simple to point to the dotcom bubble as a fair comparison?
A. So, first of all, I just want to make sure that everything is understood: I am not a value manager or a growth manager. I’m not trying to, you know, spin what works or what my investment philosophy is all the time. I’m just watching what the big pitch is. And as far as this group goes, the reason I believe once the fever drops it lasts a long time is if you go back in time, if you look at some of these hyper-growth funds there where they were in early fall 2020, that means a lot of people haven’t made any money, right? Because they kicked them out after they peaked.
And the reason the dot-com analogy is correct is that it means every time they start going up, there’s someone who can even get out. And so there is huge resistance to selling at higher levels because so many people have lost money. And to me, that sounds a lot like the dotcom bubble and other bubbles. Once a very speculative bubble bursts, it’s not a V-bottom because there are too many people looking to get out.
Q. So which cohort would you be looking at? Could you see the Nasdaq 100 falling as much as it did back then, or more like a Cathie Wood type fund?
A. It’s the difference with 2000. In 2000, the Nasdaq had obscene prices. Some of these ultra-large-cap tech stocks were also trading at triple-digit multiples. And when I look at these very high growth stocks, they’re expensive like they were in 2000, but the major tech stocks, the Nasdaq 100, the big stocks, they’re not as expensive. So I don’t think the (comparison to) the Nasdaq breakout of 2000 is accurate enough because I don’t think the really big tech stocks are as vulnerable.
Q. One thing that I always think about along these lines is that there’s something in human nature that’s always going to bring back that instinct to hunt high thieves at some point.
Q. Yes, that is true. As simple as that. But what are the conditions you would like to put in place to bring this trade back?
A. Well, I think it’s first-seller burnout, where stocks stop falling on bad news because there’s no one left to sell them. And I’m not sure we’re there yet. I did not see a big capitulation. I mean, stocks have gone down a lot, but there hasn’t been a big sell-off from those stocks. The other way to think about it is when no one believes they can buy the dip anymore. That’s when the bottom comes in, isn’t it? When people say, “I don’t want to touch them. These cannot be invested”, that is where I am interested. But when people say, “Hey, well, what do you think?” Because the memory of making a lot of money is too recent and it drives people to try bottom fishing.
I have been in this business for a long time. Human behavior does not change. And so when this type of bubble bursts, you get countertrend rallies and they go up a bit, then they go low, then they go up and down until people say, “Don’t ask me a thing more about that. I do not wanna talk about it. Let’s move on. And then I go, “Oh, that’s kind of interesting.” Maybe that means they’re hitting rock bottom.
Q. Your fund grew 36% last year. Everyone back home is wondering exactly what you might prioritize this year and how they should position themselves as the year goes on?
A. The reason we had a good year last year is simply that we played the playbook. The playbook is that when you come out of a recession, cyclical stocks do well, right? Because during recessions, people sell everything that is economically sensitive and they hold on to things that they perceive as not economically sensitive. So the gap between cyclical values and non-cyclical values is extreme. And boy oh boy did it really get extreme. So that was kind of a big pitch to own financial and energy stocks in 2021. And so it worked. The other thing that has really worked is just listening to the companies and tracking the profits. Now, just to be clear, earnings growth is not driving stock prices, those are surprises, right? The price of a stock incorporates all future expectations. So if companies do better than expected, they go up…
So at the start of this year, I think we are in an environment where central bank policy is willing to accept higher levels of inflation for faster growth which will lead to greater wage growth. Right now the Fed is starting to pivot a bit because real wages aren’t going up. So I think they’re going to take steps to reduce inflation, but I think we’re heading towards an environment where we’re going to have higher growth at the expense of higher inflation. And that’s an environment where you want to hold value stocks. Again, I’m not saying throw away all your growth stocks to buy all the value because I believe in technology for the long term. But I think we’ve come out of a decade of slow growth and are heading into a faster growth environment. And I think you want to own a few more valuable stocks. And I don’t think this year will be different from last year.
Q. You sent us a list of some stocks you really like: Alphabet, Microsoft and Danaher. Could you tell us why you like these picks in particular?
A. Our main overweights are financials, REITs and energy stocks. The “however” of this is that these stocks are hot right now. Financials and Energy have done very well this year. So I think we’re in an environment where you have to be careful at the start of the earnings season, given how strong they are. And so I’m just a little wary of owning these stocks or buying these stocks right here. And again, these growth stocks didn’t fare as well. Microsoft, Google, Danaher, they haven’t done as well because they’re not hot stocks right now. And these companies are showing very good results.
Q. You are bullish on Microsoft, you have it in both the international and US core fund. Curious what you think of this Activision Blizzard takeover this week? And what does that tell you?
A. It’s a sign that businesses are brimming with cash, which, oh by the way, what’s the return on cash right now? So I think it’s going to be – I’m not an investment banker – but I think it’s going to be a big year for mergers and acquisitions because companies have very strong balance sheets and they have a lot of money in hand and they are going to be looking for bolt-on acquisitions. So to the extent that things are immediately accretive, I think you’re going to see companies jump on it.
And not many people talk about it, but I really think the story is that business fundamentals don’t get the press they deserve. I really do. We talk a lot about the Fed and geopolitical risk, but I just don’t think what’s happening in corporate America gets enough positive press.
Those were just the highlights. Click here to listen to the full podcast.
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