Classic US stocks trading on historically cheap valuations present value traps as their growth outlook begins to stutter, according to Robeco’s star US value investor Duilio Ramallo.
The US equity manager, who runs over €2.6 billion in assets and was speaking exclusively to Citywire Global, said Coca Cola is an example of these potential traps.
‘Coca Cola is trading at 17x earnings which historically is low but actually with where the company’s growth is going, it doesn’t look cheap and we don’t hold it in our fund,’ said Ramallo, who runs the Robeco US Premium Equities fund.
'There is a discrepancy between value and growth stocks at the moment. If you look at historical valuations, some stocks look cheap but actually potential growth going forward looks more marginal.'
Coca Cola’s second quarter earnings were reported slightly down earlier this month on increasing costs. This was despite its revenue beating analysts’ expectations as sales slowed down in Europe.
In comparison, Ramallo said competitor Pepsi’s valuation looked ‘border line’ as the company has better growth prospects than Coca Cola.
The Boston-based manager said that he recently increased an already large exposure to JP Morgan.
'It remains the strongest bank in the US and is one of the banks that is able to return capital through dividend payments and share buy backs.'
This is compared to other banks which through government bailouts have limits to shareholder dividends, he added.
Ramallo said he also is favouring the communications space through companies like Horizon Communications which promise strong growth and have little exposure to Europe.
Both managers are underweight REITs (Real Estate Investment Trusts) and utilities – two sectors that have done well attracting investors looking for traditionally defensive stocks this year.
‘We have suffered headwinds through not owning utilities but we expect to see tailwinds from this position as it is herd mentality that is driving markets today,’ said Pollack.
Ramallo said this could partially explain the recent underperformance of his fund. Over the past three years the Robeco US Premium fund returned 43.2% while its Citywire benchmark, Russell 300 Value TR index, rose 55.8%.
Utilities & REITs expensive
Both funds' underweights in utilities and REITs in the last quarter saw them underperform yet the two managers said utilities remained their least favoured asset class, citing slow growth and highly regulated market.
Their underweight in REITs, they said, was rather based on expensive valuations rather than a negative outlook towards the property sector.
‘REITs have done well and the fact that we aren’t heavily exposed doesn’t reflect a negative outlook for the sector but rather a view that valuations are very unattractive,’ said Pollack.
Another area with less value includes traditional growth tech companies such as Amazon and Facebook, despite there being attractive companies in the small and mid caps, according to the duo.
No obvious bubbles
Though current valuations may be skewed on macro concerns, the managers said they did not see obvious bubbles in either the value or growth space.
‘I wouldn’t say we are back to bubble of 1998-1999 when value stocks were in a bubble with Walmart and Coca-Cola trading at 25x earnings,' said Ramallo.
‘Though larger dividend paying stocks have perceived stability, the dividend yield explains part of that and so I wouldn’t say you can really categorise bubbles at this stage.’
Since its inception in September 2011, the Robeco US Select Opportunities Equities fund returned 20.3% to the end of June this year.