As the adage goes, everything old is new again. Just as clothing fashions go in and out of style over the years, investment trends can zigzag between opposite approaches. Consider the stock market: For a dozen years after the Great Recession, markets enjoyed near-zero interest rates that fueled speculative meme stocks and a crypto mania, inspiring novice investors to declare fundamental investing obsolete.
Now the markets are in the midst of a shift back to good old stock picking driven by fundamentals—or, in the words of Ben Graham, intelligent investing, which for him meant patience, discipline, curiosity and above all thinking for yourself.
The primary catalyst for this shift is the U.S. Federal Reserve raising the benchmark fed funds rate during the past year from 0.08% in early 2021 to near 5% and likely higher. Suddenly, money has a cost in the form of high interest rates and investor priorities are changing. Sky-high valuations are out. Math is back in vogue. And the Fed is showing that it’s more committed to Main Street’s inflation problem than Wall Street’s asset prices.
This presents enticing opportunities for funds like the Parnassus Value Equity strategy, which focuses on stocks with compelling valuations relative to their history or peers.
Relative value goes beyond simply buying low-growth or low-valuations stocks, steering closer to the original meaning of the word “value: to be strong, or in good health.” Parnassus looks for quality companies temporarily beaten down for a variety of reasons: a cyclical downturn, an unexpected setback like a pandemic or a company about to see a dramatic improvement in its fortunes.
Billy Hwan and Krishna Chintalapalli, who co-manage the Parnassus Value Equity strategy, offer examples of relative-value opportunities. Some are large cap and longtime leaders that fell out of favor in an era of easy money or are poised to benefit from higher rates. Others faced unexpected setbacks beyond their control and are remedying them through sound management.
Oracle Corp. (ORCL), a pioneer in enterprise software, is engaged in a multi-year transition from on-premise software to a cloud-based, recurring-revenue business model, which is likely to broaden its addressable market through both current customers and new cloud-only clients. Oracle has invested heavily in expanding its product offerings, which may drive higher revenue growth. With a Forward Price to Earnings Ratio below 16, Oracle’s stock is positioned to benefit from a shift in demand from money-losing startups to proven leaders.
Merck (MRK) is a global biopharma company developing and marketing a diverse set of treatments cancer, heart disease, vaccines and animal health. Cash flows from these and other drugs are healthy enough to invest heavily in R&D. For example, Keytruda is a leading immuno-oncology treatment with an increasing number of applications and is poised to be a key revenue driver. Growth prospects, combined with a forward PE ratio (12.6) below the industry average (15.6), suggest promising value.
Ball (BLL) is the largest manufacturer of aluminum cans and packaging, a more climate-friendly alternative to plastic and a market where it enjoys a wide economic moat. It also owns an aerospace-sensor business linked to climate change. After recovering from setbacks such as higher inflation and the closure of profitable plants in Russia, the company is trimming operational and capital-spending costs, while remaining positioned to expand overseas. The stock is valued at 15 times forward earnings with a market cap just above its 2022 revenue.
While major market shifts can be turbulent, change can offer new value investments to the diligent. Stock picking may be more challenging than passively investing in an index fund, but it can provide forward-thinking investors with potential opportunities to enhance wealth in coming years.
___________________________
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) GUIDELINES: The Funds evaluate financially material ESG factors as part of the investment decision-making process, considering a range of impacts they may have on future revenues, expenses, assets, liabilities and overall risk. The Funds also utilize active ownership to encourage more sustainable business policies and practices and greater ESG transparency. Active ownership strategies include proxy voting, dialogue with company management and sponsorship of shareholder resolutions, and public policy advocacy. There is no guarantee that the ESG strategy will be successful.
The views expressed are subject to change at any time in response to changing circumstances in the markets and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or the Parnassus Funds.
Mutual fund investing involves risk, and loss of principal is possible. There are no guarantees any investment strategy, including a socially responsible (ESG) investment strategy, will be successful in any market environment.
Risks: The Fund may invest in small and/or mid cap companies, which are generally riskier than larger companies, and the Fund's share price may be more volatile than funds that invest in larger companies. The adviser may be wrong in its assessment of a company's potential for growth, and the growth stocks the fund holds may not grow as the advisor anticipates. In addition, there are periods when investing in growth stocks falls out of favor with investors and these stocks may underperform. The Fund may invest in foreign securities which involve political, economic and currency risks, greater volatility and differences in accounting methods.
Forward earnings are an estimate of a company's earnings for upcoming periods, usually the completion of the current fiscal year and often the following fiscal year.
For the current holdings of the Parnassus Value Equity Fund, visit the Fund's holdings page. Fund holdings are subject to change at any time. Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security.
The Parnassus Funds are underwritten and distributed by Parnassus Funds Distributor, LLC.
© 2023 Parnassus Investments, LLC. All rights reserved. PARNASSUS, PARNASSUS INVESTMENTS and PARNASSUS FUNDS are federally registered trademarks of Parnassus Investments, LLC.
Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the Funds and should carefully read the prospectus or summary prospectus, which contains this information. A prospectus or summary prospectus can be obtained on the website, www.parnassus.com, or by calling (800) 999-3505.