A new era for growth stocks A new era for growth stocks https://stage-fii.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png https://stage-fii.federatedinvestors.com/daf\images\insights\article\innovation-man-painting-small.jpg May 15 2020 May 5 2020

A new era for growth stocks

Companies that continuously innovate should continue to lead.
Published May 5 2020
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As investors enter an uncertain economic environment in the shadow of Covid-19, they will inevitably weigh potential winners and losers in the months and years ahead. We believe three factors, all likely to gain momentum, signal the endurance of growth investing.

  1. Slower for longer economic growth Growth-oriented companies tend to not need a roaring economy to sustain profits. This was the case from 2009-2019 following the financial crisis. And this is especially true for proven, credible innovators that have years of runway for their products/services to grow. These are companies with low debt, experienced management and a wide competitive moat. In many cases, their success or failure is largely self-contained and not as dependent on external economic or market cycles. One example that is particularly relevant today: biotech firms that, in coordination with the FDA, continue to launch proven therapies on their own timelines. Anticipating higher debt and a more cautious consumer whose habits have evolved as a result of this pandemic, we expect earnings quality to drive equities higher, benefitting growth stocks.
  2. Innovation increasingly key to survival Over the past 50 years, only 12% of S&P 500 companies have survived. In 2000, the top three companies by market capitalization were GE, ExxonMobil and Pfizer. At the end of 2020’s first quarter, Microsoft, Apple and Amazon assumed those positions. Given the constant movement in consumer trends and preferences, not to mention new technologies that support them, companies will need to significantly invest and innovate to maintain relevance. In just a few years, Harry’s and Dollar Shave Club upended stalwart Gillette’s longstanding dominance. In less than a decade, Netflix went from DVD distributor to video/digital portal to content creator. It likely will need to shift its business model yet again. In the future, growing numbers of companies will need to retool their strategies, reinvent themselves as entirely new companies—or face extinction.
  3. Shrinking product lifespans demand constant improvement To respond to a diverse, global consumer, products are being commoditized faster—from consumer electronics and appliances to fashion, food and beauty products—making them more appealing, affordable and accessible. The pace of technology, rapidly changing consumer preferences and expectations, and the scalability of production globally leave little room for error or patience. Apple risks extinction if it doesn’t create a new phone, device or service every year. Companies that fail to keep pace by improving, accelerating e-commerce offerings or stepping up convenience and delivery speed eventually will lose their edge. 

From “buy and hold” to “innovate or fail”

Investing is always about challenging the status quo; free markets have been lucrative throughout history because individuals with new ideas wanted to change things for the better. That is still true today; in fact, change is happening at a pace previously unseen. The largest tech companies seem to be impenetrable but inevitably they will be commoditized just as they commoditized the companies they replaced. More choices, competition and technological innovation always benefit the incumbent for a time, but they can be knocked aside by new challengers that come in with better, simpler, more efficient ways of doing something. Investors always should be on the lookout for what’s next as should the companies that are king of the hill … for now.

Tags Equity . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Growth stocks are typically more volatile than value stocks.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

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