Factoring Inflation and Valuations into Stock-Picking Decisions

Our Chief Market Strategist Stephen Dover speaks with portfolio managers Matt Moberg from Franklin Equity Group and Aram Green from ClearBridge Investments on how they factor inflation and valuations into stock-picking decisions. They also cover the impacts private and special purpose acquisition companies are having on markets. And, why some innovative companies and technology that are changing our lives may not make great investments.

Listen to the podcast here. A transcript follows.


Stephen Dover: Aram, as a growth investor, markets are at a high level, P/E ratios are at a high level, inflation is now a concern, especially with growth stocks, so how do you feel comfortable with current valuations?

Aram Green: We believe that investors should not get vertigo when looking at stocks with high multiples. A low multiple or a high multiple isn’t a good predictor of whether a stock or investment is cheap or expensive. Oftentimes, we find that companies with low multiples are cheap for a good reason. There’s something structurally broken about the business, it’s laden with debt, various other reasons. And likewise, for a company that has a high multiple, there’s probably some good reasons why that business is trading at a high multiple.

We really need to understand all the fundamental dynamics of a business before looking at those multiples. And the way that we approach it is, and getting comfortable with some of these higher multiples, is looking at the addressable market for which this company fits into, making sure that there’s that product or service fit, spending time to understand the unit economics and the returns of the business in today’s market environment as well as future market environments, and spending a lot of time de-risking the business to understand the visibility and the durability of the growth and returns out of the business. And a big element of that is understanding the ESG [environmental, social and governance] risks as well, because that could seriously derail an investment if there’s underlying misalignment between investors and the company or management team in terms of how their incentive, where the company is deploying capital, environmental or social risks that are underlying the business service or product.

And so, it’s always all of those elements to understand and de-risk that helps you unfold where the opportunity is, and to put that multiple into context.