Explore Our investment Outlook
We’re in an undeniably difficult period for growth equities, where inflation and interest rates are rising even as economic growth appears to be slowing. Under these conditions, we continue to believe there are attractive opportunities for patient, long-term investors.
We’re taking steps to address our portfolio positioning. First, fundamental research remains our core competitive strength and primary value proposition. Our visits to companies focus on understanding the opportunities available to corporate management. These discussions are crucial to understanding how firms may adjust their priorities if their cost of capital continues to rise, or the economy goes into recession.
We also scrutinize regulatory filings to help ensure we have a comprehensive understanding of a company’s risks, particularly its financial position. That’s essential because rising interest rates and falling equity markets have made debt and equity financing more expensive. With this backdrop, we are assessing whether businesses have sound balance sheets and adequate capital to fund their growth ambitions.
In addition, we are actively analyzing and stress testing the downside risk. We know growth stocks could be vulnerable to further downside volatility and prepare for that possibility. While we believe select companies remain undervalued when considering their long-term business prospects, we will adjust our position size when we believe the risk of capital loss is disproportionately high, particularly in the case of companies with negative free cash flow or “cash burn.”
As growth investors, our goal is to own companies we believe are positioned to emerge stronger from this cycle due to their healthy balance sheets and adequate capital to fund growth. Without doubt, corrections are painful in the short run. But we believe sell-offs offer an opportunity to own more attractively priced companies benefiting from compelling growth potential.
Of all the macro concerns spurring market volatility this year, the steep increase in inflation may pose the biggest challenge for corporate management teams. It can be difficult to pass through higher costs without hurting demand, even for companies with strong competitive positions, powerhouse brands and loyal customers.
Inflation began climbing more than a year ago. This has made evaluating a company’s ability to pass along rising costs vital to our fundamental analysis. We think companies with pricing power may be well-positioned to survive inflation’s effects and potentially rise above them.
Accounting for roughly 70% of the country’s economic activity, consumers are the lynchpin for determining whether the U.S. can avoid recession. Despite many concerns overhanging the economy, unemployment is near all-time lows, and consumers have proven resilient with healthy bank accounts.
Still, we’re starting to see some cracks. The recently completed earnings reporting season revealed shifts in consumer spending habits. Due to higher prices for gas and food, retailers are reporting that shoppers are proportionally spending more on lower-margin food items and less on higher-margin clothing and discretionary goods.
With pandemic trends leading many people to resume venturing outside their homes, some multiline retailers have overstocks of “stay-at-home” items such as TVs and furniture. This shift is a lesser consequence for companies that make the products consumers depend on daily and frequently purchase regardless of the economic cycle.
Durable brands, leading market shares and strong balance sheets are hallmarks of large companies like Procter & Gamble, Conagra, Hershey’s and Mondelez. We think some companies with attractive assets are undervalued and underearning their normalized potential.
When the pandemic began, many policyholders drove less and accident claims fell dramatically, reducing insurance companies’ operating costs. See Figure 1. Most insurers provided some relief to their policyholders through refunds or reduced rates.
Americans have since returned to the roads, increasing the number and severity of accidents. Auto claims costs have risen due to higher labor and materials costs and supply chain-related issues. State regulators are granting rate increases to many insurers. Higher rates help companies recoup the higher loss costs and restore profitability to normal levels.
Moving 12-Month Total Vehicle Miles Traveled
Data as of 3/31/2022. Source: U.S. Federal Highway Administration, Federal Reserve Bank of St. Louis.
The inflationary environment continues to challenge the operators of hospitals, outpatient clinics and long-term care centers. Staffing shortages, overtime and the costs of “traveler nurses” have pushed up payroll burdens.
Payer reimbursement rates are not keeping pace with inflation, forcing many hospitals to trim services to maintain profitability. Hospitals seek price increases, but health insurers and employers are pushing back. These trends will likely continue for the foreseeable future and strain many operators’ budgets.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.