Alger vice president Arthur Nowak thinks “the biggest opportunities right now are in growth equities, particularly in the small-cap and midcap space… because some of the deep valuation discounts” these stocks are experiencing.
Speaking with the New York Stock Exchange’s Judy Shaw for “ETF Leaders Powered by the NYSE,” Nowak explained that “over the last 20 years, midcap growth stocks in general have traded at an 18% premium to the overall market.” Currently, they’re trading at “around a 16% discount.”
“So, they’re trading 30% less than they have been over the last 20 years. And that is very similar to the small-cap space as well,” Nowak added.
The Alger VP said that the last time valuation discounts were this deep “was right after the dot com bubble,” when “midcap growth stocks outperformed the overall market by about 30%, and small-cap stocks outperformed by about 60%” for about five years after the bubble burst.
Nowak also pointed out that before Omicron hit, investors believed “we were going to have this grand reopening.” So, investors “started looking at cyclicals; they started buying airlines instead of A.I. companies; they were buying cruise ships instead of cloud computing” companies. This has led the prices for growth equities to “come down significantly” while “the fundamentals have only gotten better.”
Nowak said that investors who want to take advantage of the deep discount in midcaps may want to check out the Alger Mid Cap 40 ETF (FRTY), an actively managed ETF focused on “the best 40 names” that portfolio manager Amy Zhang and her team of seven dedicated analysts can find in the midcap growth space.
Despite these rotations out of growth into value, Nowak believes these rotations into value “might be short-term trades,” and noted that “growth has outperformed value by an average of about 500 basis points a year.”
“So, we’re growth investors, we’re investing in disruptors and innovators, and that’s what we’ll continue to do,” Nowak added.