by James MacGregor, CIO, US Small and Mid Cap Value Equities, AllianceBernstein
As we go into 2022 and ’23, we’re going to have an economy that’s going to be quote-unquote normal. But the normal that we’re going into will not resemble the normal that we left behind in 2019. And so I think investors are going to continue to want to understand how a company’s business model, how its strategy is going to intersect with that.
Value company profits came through the recession at a level and a cadence that was much higher and much stronger than folks expected. And if we entered 2021, we had this backdrop, as investors began to try and understand, was there an increased sustainability of these profits? Was that transition to that greater profitability going to persist? I don’t think any of those questions have been answered as yet. The gap between value and growth stock valuations continues to be historically large levels, and investors’ skepticism around value profits remains quite high, even despite the evidence of these companies generating those sustained profits. As investors in value companies, we’re very focused on a certain type of value company that we think is going to be best positioned to navigate that—the companies that we think are going to be the ones that close that historically large discount between value stocks and growth stocks.
It’s all about earnings at the end of the day. What type of companies do we think, as investors, can generate that sustained level of earnings and profitability? We believe that companies that combine attractive valuations and high quality, measured by things such as strong management teams, good business models, solid balance sheets, are the ones that are going to be best able to navigate through the challenges that I see, that they’ll be able to understand how to navigate past the supply-chain bottleneck. They’ll be able to change their cost structure in a way that minimizes the effect of inflation, for example. They’ll be able to navigate through the potential closures or impediments that come from whatever new variant of the pandemic that might occur next year.
And we think that the place to be for investors in a value environment is with those companies that combine value and quality, because our view is that they are best positioned to A, capture that very large historic spread between value and growth. So to see that rerating, if you will, of the multiples people pay for those stocks. And they’ll do so because they’re going to engender increased confidence in investors of that sustained earnings power because their quality’s going to lead to those earnings coming through.
James MacGregor was appointed Chief Investment Officer of US Small and Mid Cap Value Equities in 2009. In this role, he acts as the lead portfolio manager for AB's US Small and Mid Cap Value strategies. MacGregor was appointed Head of US Value Equities in 2019, responsible for all US Value portfolios in the areas of business management and talent development. From 2009 to 2012, he also served as CIO of Canadian Value Equities. From 2004 to 2009, MacGregor was director of research for Small and Mid Cap Value Equities, overseeing coverage of companies for the Small Cap and Small/Mid Cap Value services. He started as a research analyst covering a wide number of sectors for those same services. Prior to joining the firm in 1998, MacGregor was a sell-side research analyst at Morgan Stanley, where he covered US packaging and Canadian paper stocks. He also serves as a board member and volunteer for Xavier Mission, a charitable organization that provides basic services and opportunities for empowerment and self-sufficiency to New Yorkers in need. MacGregor holds a BA in economics from McGill University, an MSc in economics from the London School of Economics and an MBA from the University of Chicago. He is a CFA charterholder. Location: New York
