Extreme concentration on markets is creating pockets of value in unlikely places. CORY MARTIN explores where to look.
- Markets more concentrated than ever
- Value in emerging markets, defensives
- Find out about Barrow Hanley’s global equities investment solutions
INVESTORS should rotate toward high-quality businesses with stable earnings and strong balance sheets as cyclicals and mega-cap tech become more expensive, says Barrow Hanley’s Cory Martin.
Markets are trading at or near all-time highs despite mixed economic data, high geopolitical risks and persistent growth concerns, led by a persistent rally in a concentrated group of high-growth AI-stocks.
But Martin says the extreme concentration means there is a growing cohort of high-quality businesses that have been left trading at discounted multiples, offering opportunities for investors willing to look outside the big names.
“The top 10 stocks by market cap make up 39 per cent of the US benchmark. It’s more concentrated than it’s ever been,” says Martin, Barrow Hanley’s CEO and portfolio manager.
“In all of our strategies, our median market cap is way below the broad market indices – that’s where the value is.
“We’re constantly resetting the portfolio with what we consider really strong fundamental companies with above average historical profitability, ROE and earnings per share growth rates better than the broad market, at really cheap prices.
“Expected future returns are all about the entry point.”
Disciplined value approach
Founded in 1979, Barrow Hanley is one of the few remaining firms dedicated exclusively to value investing.
The firm takes a strict bottom-up approach that aims to buy high-quality companies at cheap valuations.
“There’s a spectrum of value,” says Martin.
“On one end, you have deep value – cyclical with a little more stress around the balance sheets.
“On the other end, you have quality compounders, defensive value.
“When you get a risk-on rally, these two ends of the market behave in opposite directions – defensive stocks will underperform, the cyclicals will rally.
“That’s what we just went through – so we’re rotating the portfolio slowly.”
Emerging markets opportunities
Martin says as the AI tech rally continues in the US, emerging markets are offering attractive opportunities.
“We began adding to China after the Chinese Communist Party did a crackdown ... and really hammered companies like Alibaba (NYSE: BABA) and Baidu (NASDAQ: BIDU).
“These companies are world class – Alibaba is the Amazon of China. Baidu’s got arguably the best large language model, supposedly three times larger than ChatGPT.
“These things got really, really cheap.”
Martin says when China was widely perceived as uninvestable by many global institutions, Barrow Hanley started taking positions.
“We’re just following breadcrumbs of valuation and dislocations around the world, and a lot is in emerging markets.”
Healthcare disruption
US healthcare stocks are going through a similar disruption now, as a pricing and policy reset pushes the managed-care sector to unusually low valuations.
“Right now, there’s huge opportunity in the managed health care sector.
“The whole sector is down… Humana (NYSE: HUM), UnitedHealth (NYSE: UNH) – these names have been cut in half, and they’re really high-quality compounding businesses… that’s a great opportunity to come into those names.
“If you get a really massive dislocation in the market where everything’s down, that’s one of the greatest times.”
Barrow Hanley is also overweight utilities and real estate investment trusts.
AI opportunities
Martin says the market’s fixation on AI hyperscalers like Alphabet (NASDAQ: GOOG), Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) is even opening opportunities elsewhere in tech.
“Think of it this way — the capex spenders are the Magnificent 7. The receivers of the capex is where we're focused — power generators, utilities, suppliers, and the people that make the data centre equipment,” says Martin.
That includes cooling systems maker Vertiv Holdings (NYSE: VRT), networking gear supplier Ciena (NYSE: CIEN) and utility Entergy (NYSE: ETR).
“We're fundamentally focused on businesses and the drivers of the business – and we’re looking for cheapness with above average quality and a catalyst to win.
“That combination is where the alpha is.”