In the latest video Chief Investment Officer Steve Johnson talks to Portfolio Manager, Harvey Migotti, about investing during a market downturn. Steve and Harvey discuss some of the investment opportunities that have taken place surrounding growth stocks, in addition to why a market correction is sometimes considered healthy.
Transcript:
Steve
Hi everyone and welcome it’s Steve Johnson here, Chief Investment Officer at Forager Funds, and I’m joined by our Portfolio Manager on the International Fund, Harvey Migotti. We’ve just released our February monthly report and talked a bit in there about cutting our exposure to some of our most successful investments over the past 12 months. We were getting very concerned about some of the valuations of these stocks that are good businesses and growing well, but where the share price has run up massively. It’s already looking a little bit dated before it’s gone out. That’s sort of been the theme of the past 12 months that things are moving at breakneck speeds.
Harvey
We need to post this video quickly because things have pulled back quite heavily over the last week. So by design we came into the end of February with the highest cash weighting for over two years, since I joined at least, and ready to deploy into new opportunities. I think it’s been particularly exciting for me seeing some of these things pull back and come back to more sensible, reasonable valuations.
Steve
It’s been a really violent rotation out of some of these stocks. We wrote in the report that an airline that we own in the US was up 40% in February. And really from the middle of February through to the past couple of days, you’ve seen a lot of these stocks- I think the QQQ Index, which is an index of super rapidly growing companies down more than 20%.
Harvey
It’s been pretty violent. You had a violent upswing as well, so we shouldn’t forget that on a 3 – 6 month view, a lot of names are still up quite a lot, but we certainly saw quite a bit of complacency developing in the market, a lot of retail investors investing in businesses that sounds sexy on paper, whether it’s renewables or EVs or whatever else. Valuations kind of got ahead of themselves. You needed this correction, I’m actually really happy for it because you had a bit of a rise in rates, a bit of a rotation into some of the beaten up sectors to come to more normalized valuations. I think it’s been healthy, the market was acting a bit unhealthy for my liking and this has been good. And to be honest, we came into this with a good pile of cash. We actually bought two new positions that we’ve been tracking for a while now.
Steve
So I was about to ask, it might feel a bit funny for people, we only just released the report saying we’ve been selling some of this stuff, but the magnitudes of the falls have been so significant. Are you seeing things out there that it’s time to start buying?
Harvey
100 percent. Like I said, we actually pulled the trigger on two investments yesterday, names that we’ve tracked for a number of months just waiting for our shot. I hope it’s a free kick on goal, but it certainly feels like a decent chance at least. Names that have fallen 40% from the highs, for no particular fundamental reason just to kind of get caught up in the rotation and, and various other things. It’s been great from that perspective. We love that volatility because it allows us to buy really good high quality assets at a discounted price. Both of these happen to be in the growth bucket.
Steve
We won’t talk about specifics just yet. Maybe put them in a future monthly or quarterly report, it’s too early at the moment. But a feature of a couple of potential investments that you and I were talking about last night was there was a recent capital raise in there. The share price is way down on where the capital raise was. Do you think that adds to the investment interest?
Harvey
Yes, what happens is you get a lot of people come into raises because they want to make a quick buck. You kind of come in below the market price, you can deploy significant capital in something that’s maybe not so liquid, and you buy in with the hope that you can sell 10-15% higher. You’re kind of almost a tourist in the stock. If you happen to do that into a big sell-off, it’s one of the easiest things to cut. New position for you and you haven’t necessarily done a lot of work.
Raises happen quickly. You’re talking 24 hours, maybe a few days, if you’re lucky. It’s an easy thing to cut and I think one of the opportunities that we found is one that we’ve loved for a long time where they just did a big raise back in February. And a lot of these people into the downturn they just sold out. They’re like, “okay I give up I’m not going to make my 10%, I’m down 10%. Let’s just get out what we can”. And that’s just exacerbated the fall. It kind of didn’t make sense, but it got caught up in a whirlwind and we love those opportunities because you don’t get them often, but when you do, and it’s in a name you’ve tracked for six months, you have to pounce.
Steve
You get the price falls and often you get a lot of liquidity that comes with that as, as people start to run for the exits. The pace of change over the past 12 months has been a lot of hard work for you and for the rest of the team, but it has been reaping some sensational performance results as well. To be honest, we hope the volatility continues over the coming months and years.
Harvey
It’s like I said, it’s been good – 25% of our portfolio is now new ideas that we’ve put in since January. It’s exciting and I’m excited as ever about the potential here. I think the rotation has been great. It’s a good time to both invest in us and buy parts of the market that have paired back. There’s always opportunities is what I’d say.
Steve
Jump on our website if you’d like to invest or get in touch if you have any questions. Thanks for tuning in.
Growth investing is one of the most popular approaches to investments. An investor tries to find companies that would likely to outperform its peers and the overall markets in the future. In order to buy high growth companies, an investor also needs to pay a premium to some extent which makes is different from value investing. As per current market situation I guess its quiet uncertain to say whether growth stocks will perform or not. Rest depends upon the market news in this sector. It’s not bad to include growth stocks in one’s portfolio.