Dan Kozlowski (pictured), Portfolio Manager at Janus Capital Group argues that changing company strategies are good news for contrarian investors in equities.
Equities enjoyed one of their best years on record in 2013 but, now that multiples have broadly expanded, it is hard to envision a catalyst that will dramatically lift all stocks. The remaining opportunity set in equities is limited to those companies that grow earnings to justify their current multiples, or companies that experience a complete shift in market sentiment caused by the company rewriting its long-term destiny. In our view, the push driving further stock-price appreciation must come from within.
In the last five years, slow growth has put increasing pressure on many corporate boards to get creative in order to affect real, often dramatic, changes that improve their per share profitability.
As an example, the European sovereign crisis forced restructuring and union concessions at many large companies, making them more profitable and competitive. In the U.S., shareholder activism in the industrials sector is high, and new management teams are improving the fundamentals for many companies.
We are also seeing big changes among specialist pharmaceutical companies, where merger and acquisition activity is consolidating the industry, and where new financially-minded CEOs are taking out costs and making research and development spending less risky for their companies.
In a world where a slow economy forces companies to create their own avenues for growth, shareholder-friendly boards are making major changes to their businesses in order to remain competitive. We are already seeing a wide ranging response from some companies, including the divesting of noncore assets, the changing of management teams or acquisitions that consolidate the industry in which the company operates.
This is good news, at least for contrarian investors who seek stocks that are set to experience a change in market sentiment. We expect this trend to continue and – in a market environment where valuations for most stocks have already risen considerably – we would expect that it will be the companies making these kinds of changes that will be the top performers.