Impact Blog
Potential opportunities on the horizon for high-quality equities

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Calvert fund. References to individual companies for Engagement or Research purposes are provided for illustrative purposes only and may not be representative of the results of all of Calvert’s engagement efforts. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Matthew Hereford, CFAVice President and Principal, Atlanta Capital Management

      Atlanta - It's been a very interesting year, to say the least. We've had a strong rebound in equities from their March lows, driven by a concentrated market. Similar to 1999 and early 2000, it's primarily large-cap, technology-oriented names dominating returns and I see a lot of "animal spirits" at work.

      In the mid-cap space, many software stocks are trading at not 20, 30 or 40 times earnings, but at 20, 30, 40 or 50 times sales — and in some cases, even higher. It's been a risk-on market and with the valuations being afforded to some companies, we are seeing a lot of stock issuance and initial public offerings.

      Current valuations lead us to believe that some of these technology companies and others driving current index gains may eventually disappoint investors. It wouldn't take a huge shift in capitalization from the top index names to potentially drive fairly strong share price movements in some of the other index positions.

      Our strategies invest strictly in high-quality stocks and have high active shares. These traits, along with others, make us feel well positioned if the market were to shift. Higher-quality companies typically have consistent earnings, strong balance sheets, significant free-cash-flow generation, growing revenues and meaningful competitive advantages, whereas the opposite is true for their lower-quality counterparts. Historically, high-quality equities have outperformed over full market cycles.

      We are optimistic about the future prospects of the consumer-related names held in our portfolios that have been punished in the short term by the pandemic and unemployment levels. In our view, a bet against these types of companies is a bet against the reopening of the US economy or a potential vaccine — and we have full confidence these events will occur.

      Looking ahead, it's not only what we own that makes us excited, but it's also about what we don't own — where we see valuations being so stretched. As capital comes out of those expensive names, we expect that investors will likely turn to some of the high-quality stocks that are owned in our strategies.

      Bottom line: As the economy recovers, we anticipate that market leadership may evolve from the handful of technology stocks currently dominating returns to other economic sectors and capitalization ranges. We believe our strategies are well positioned if the market were to shift.