Rising economic growth, rising inflation and rising interest rates bode well for value stocks, says Putnam’s Michael Petro.
Michael Petro, portfolio manager of Putnam Small Cap Value Fund, is bullish on small cap value stocks.
“A resurging economy combined with higher inflation could bring double-digit nominal growth rates to a wider swath of the investing universe,” he wrote in a commentary. “This should make reasonable growth less scarce and attract investors to the long-neglected small-cap value space.”
Petro and his colleagues anticipate a reversal of the long, low-inflation trend, and that’s good for small-cap value stocks, he said.
“The Russell 2000 Value Index has greater exposure to sectors likely to benefit from sustained inflation. These include financials, energy, and basic materials stocks,” Petro said.
Rising interest rates should also help value stocks, he said.
“These are companies whose earnings are typically assessed in the here-and-now as opposed to future earnings that will be discounted based on increasingly higher interest rates,” he said.
Valuations also are attractive, Petro said.
“Investors may find small-cap value multiples too good to pass up, especially when earnings begin to accelerate for these companies,” he said.
“At the end of 2021, small-cap value stocks were trading at a forward price-earnings ratio of 18.5. This compares with 50.1 for small-cap growth stocks and 22.5 for the largest 1,000 stocks.”
As for the Putnam Small Cap Value Fund, its biggest holdings from the top as of Dec. 31:
· Vista Outdoor (VSTO) – Get Vista Outdoor Inc Report, a sporting goods company;
· Sm Energy (SM) – Get SM Energy Company Report, an oil producer;
· Magnolia Oil & Gas (MGY) – Get Magnolia Oil & Gas Corp. Class A Report, also an oil producer;
· The Hackett Group (HCKT) – Get Hackett Group, Inc. Report, a consulting firm; and
· Unifi (UFI) – Get Unifi, Inc. Report, a textile maker.
