Great investing debate: Growth or value stocks post-rate cuts?

It's an age-old question among investors: which is better, growth investing or value investing? After the Federal Reserve's interest rate cut this week kicked off a highly-anticipated easing cycle, Catalysts hosts Seana Smith and Madison Mills spoke with a panel of experts about how the two investment strategies could play out in the months to come.

Vontobel portfolio manager Markus Hansen and Greenwich Wealth's CIO Vahan Janjigian join Catalysts to lay out their investment thesis.

Vahan favors value over growth — but says he's not a strict value investor. "What I really favor is stocks that are undervalued," he says, "and in many cases, that can be growth stocks." In terms of investments, Vahan notes he's leaning toward traditional value stocks, like IBM (IBM), Verizon (VZ), and Pfizer (PFE).

And in the wake of the Fed's latest rate cut, Vahan sees small caps (IWM) as benefitting from changes to the yield curve. "I think as things normalize, we'll get back to what's considered normal. And that means value stocks outperform growth stocks and small cap stocks outperform large cap stocks."

Markus and his team at Vontobel are quality growth focused. He says post-rate cut, he expects dividends will get a lot of love from investors. That's why he's favoring "good old fashioned names" like Coca-Cola (KO), Walmart (WMT), Home Depot (HD), and PepsiCo (PEP) for their sustained dividend growth.

Luxury is also a sector he finds compelling for its wide economic moat. "It requires time to build that heritage, and to be the top brand," he says, and that longevity makes companies like Hermes (RMS.PA), Ferrari (RACE), and Richemont (CFR.SW) compelling.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Kathleen Welch

Video transcript

Let's get to an age old question among investors, which one's better growth investing or value investing?

That's right.

Cut this week.

Kicking off a highly anticipated E cycle, we're taking a look at how those two investment strategies could play out in the months to come here to discuss.

We've got a panel of crack experts.

One is team growth.

The other is team value here.

We're joined by Marcus Hanson, one to portfolio manager.

We also got Vehanen Jin.

He is the CIO at Greenwich Wealth Management.

Thanks so much for being here.

So Marcus, let's start with you.

Let's talk about growth.

Why are you bullish?

Yes.

So we are quality growth focused.

So by quality growth, what we like are great long term companies with great franchises, deep moats, strong pricing power, long term returns driven by margin, free cash flow and the ability to reinvest in their business.

But also to give some of that cash back to shareholders and with, with the fed rate cut.

I think one thing that will come back into emphasis here is dividends and dividend growth.

A lot of our companies uh part of their total share return is driven by dividends.

Very nice dividends.

So, although everyone thinks about growth as technology companies and stuff, so there are some good old fashioned names, Coca Cola, Walmart Pepsico, particularly the likes of Pepsi and Coke have given you sustained growing dividends for more than 60 plus years in a row.

And if you speak to a certain gentleman in Omaha, Mr Warren Buffett, he'll tell you the greatest way to wealth creation is compounding and a big part of compounding is this growth of dividends along with sustainable visible earnings growth.

So I think, you know what we're seeing with the fed rate cut is a benefit to what consumers are going to be doing in terms of spending.

But also coming back to these great growth companies, long term historical growers and Marcus, we wanna get into your picks here in just a second.

But Han I wanna go to you because you're on the other side of this, I guess, debate that the street is having right now and you actually see value in value right now.

What makes it attractive in this environment to you?

Well, actually, I think Marcus kind of made my case.

I kind of agree with everything he said.

I'm, I'm I'm a big fan of dividends too as well as uh dividend growth.

And, uh, you know, I also, uh I'm a fan of the power of compounding.

Um, but in general, I think, um, you know, most growth stocks are overvalued right now.

Um If you, if you split the uh the universe of stocks into two categories, growth and value um over long periods of time value tends to outperform growth that has not been true over the past 10 years.

So either something fundamental has changed or we're just in an aberration right now, we'll go back to what has worked over over the very long term.

So, so typically investors define growth stocks as those that have, you know, either uh high, um they have high valuation ratios such as uh price to book.

Um but they also have a higher than average rate of growth in, in both revenues and um and earnings whereas value stocks are the opposite.

However, what I really favor is stocks that are undervalued, meaning that they're selling for less than they're currently worth and um in many cases that can be growth stocks, but, but right now, I am leaning more toward the traditional value stocks and uh some of my favorites right now are um IBM Verizon and Pfizer.

Um These are three large cap value stocks that um have very uh generous dividends.

Um and they've been increasing their dividends every single year for, you know, in Pfizer's case, at least 15 years, um IBM and Verizon are even longer.

So I think these stocks are undervalued.

And as a former uh finance professor, I have to say that, you know, the only theoretically correct way to determine what any asset is worth is to do a discounted cash flow analysis.

Um Of course, uh that requires making assumptions um and estimates and that's where you can go wrong.

So van real quick, I th this is more of a valuation call, I guess in your view versus any sort of worrisome about underlying economic fundamentals or anything like that, that sometimes surrounds the argument for a value trade.

Well, uh that, yeah, that's true.

But, but, but, but not quite so.

So right now we're in a period where the fed is reducing interest rates.

And in general, it's true that lower interest rates are good for all kinds of assets, not just growth stocks, but also value stocks, but it, but it's not just the absolute level of interest rates that matters, it's also the shape of the yield curve.

And, you know, right now we are, we are coming out of a period of an inverted yield curve and I think we're gonna start eventually seeing the yield curve normalized so that long term interest rates are likely to go higher even though the fed is reducing short term rates.

And I think that's a scenario that favors value stocks over growth stocks, Marcus, going back to you, I'm interested in how your points overlap because I think it points to this question that we've heard especially from the likes of Microsoft, increasing their buybacks this week and becoming a little bit of a cap play for investors can tech become the new value dividend.

Buffet.

Loving play.

It's a great question.

So we are starting to see significant cash flow generation and there are certain tech names we do like Microsoft is the name that comes to mind alphabet, the parent company of Google which actually falls in the value camp to a certain extent in terms of its pe ratio relative to others and the specific reasons why that might be happening.

Yeah, great franchises.

Technology is a tougher one but the net net effect is dividends are becoming important.

Now, this is early stage for dividends for the tech companies.

They really only started it in the recent couple of years.

So again, I come back to this idea of the long term compounders tend to be the ones that have a proven track record of not just giving you a dividend with a yield but a sustainable growth dividend.

But yeah, absolutely.

Technology, some of these aims are household, you know, Microsoft the way he's developing his business model.

And certainly if you look at alphabet, not just the Google search engine, but all the various parts, very attractive loss of cash.

And it's a nice thing when they give it back to you as part of their growth.

It is a nice thing when they give it back to you.

It's very, very benevolent of them.

You talked about Walmart Home Depot Coca Cola.

I want to get to some names that are not the everyday every man household name, which is the luxury stocks that you have as a stock.

Why?

So these are more of the international names but names that your viewers may know.

So Hermes based in Paris, you have a company called Richemont, whose main brand is Cartier in Van Cleve, the jewelry side.

And then I heard one of your previous commentators talking about Ferrari, which although is a car company actually has all the attributes of a luxury, the luxury industry we think is fantastic in terms of its long term moat the heritage, it requires time to build that heritage and be the top brands.

So very tough to break into there overnight.

They pretty much control their demand and supply.

I mean they do it to a certain extent in the sense that they can only build so many handbags, only so many cars of that fine quality.

And so you have fantastic visibility and then more importantly, the end customer tends to be on the high net worth individual side, which is a growing share of the population globally, but the number of cars they're selling.

So for instance, Ferrari only sells about 14,000 cars a year.

It sounds like a big number, but there's 95 million sold every year.

The handbag side of Hermes, which is specifically because of their inability to produce more is very limited.

And then if we go to the high end of jewelry, which is not just a fashion statement but also an investment piece over time.

Cartier and Van Cleef are truly the top brands that people want to associate with.

Um These are great long term stories and there's been a recent pull back on worries about China in some of these names.

We think that's a fantastic opportunity to add again as well.

And those also fall into the area of family driven.

I mean, to be hers is 1/6 generation family running it.

They're taking the 4050 year view.

So they'll be around for a long, long time.

I want to end with you as you were pointing out before some of your topics or some of your big positions right now, IBM Verizon, you're also still adding to pfizer on weakness.

I'm curious where you stand on small caps because you briefly in your notes said that you were buying small caps.

Why is that attractive in this environment?

I think small caps are also in a position to uh to benefit from an upper sloping yield curve.

Um you know, small cap stocks.

Um Also, if you look over the history of the stock market, small cap stocks do tend to outperform large cap stocks.

And again, that hasn't been true in the past 10 years.

So I, I think as we start to normalize the past 10 years were very unusual in the sense that, you know, the federal, uh dealt with several crises and brought interest rates down to, to zero.

But I think as things normalize, we'll get back to what's considered normal.

And that means value stocks, outperform growth, stocks and small cap stocks, outperform large cap stocks.

Now, I'm not directly buying small cap names, uh, so much as buying uh, small cap.

ETF.

S. Um, you know, right now I've been adding to, uh, both IWM and, uh, VB, which is the, uh, vanguard small cap.

Um ETF what a wholesome debate for Friday guys.

I appreciate both of you for coming on.

Really appreciate it, Marcus Hansen.

He is with Von Tobel as their portfolio manager.

We also had Bahan John J CIO over at Greenwich Wealth Management.

Thank you both so much.