But with interest rates rising, growth stocks no longer have that advantage, creating opportunities for value stocks.
“As inflation raises its head, interest rates will go up a lot more,” Bobrinskoy said. “Our companies’ current earnings will become more valuable compared to growth stocks.”
Stocks That Fit the Bill
With inflation and interest rates rising, “you will want companies with real assets and current cash flow,” he said.
Ariel Focus Fund’s two biggest holdings fit that bill: APA (APA Get APA Corp. Report , an oil producer, and Mosaic (MOS Get Mosaic Company Report , which makes fertilizer.
“Real assets in the ground go up in a time of inflation,” Bobrinskoy said. So it’s no wonder those two stocks have risen in recent months.
Focus Fund also holds some financial-services companies, which tend to benefit from rising interest rates and are trading at low valuations. Higher rates help banks because deposit rates generally climb more slowly than loan and investment rates.
One Focus Fund financial holding is Northern Trust (NTRS Get Northern Trust Corporation Report . The bank serves more than half the Forbes 400, does very well when interest rates rise and trades at 13.5 times forward earnings, Bobrinskoy said.
Lazard (LAZ Get Lazard Ltd Class A Report , a boutique investment bank, is another Focus Fund financial stock. It trades at 6.8 times forward earnings and is looking at changing its corporate structure in a way that could boost the stock, Bobrinskoy said.
Carveouts and Spinoffs
Another theme for the Focus Fund is carveouts and spinoffs.
Resideo Technologies (REZI Get Resideo Technologies, Inc. Report is a thermostat business that was spun out of Honeywell (HON Get Honeywell International Inc. Report .
“We like spinoffs because management gets buried in conglomerates,” Bobrinskoy said. “They don’t get the attention and capital they deserve. Now they can allocate capital in the most efficient manner.”
Resideo is trading at 12 times forward earnings.
Nielsen (NLSN Get Nielsen Holdings Plc Report , the media audience-measurement company, also is in Focus Fund.
“This one is very controversial. We like to buy what others don’t,” Bobrinskoy said. The bearish case for the stock is that people are watching less television, given the trend toward cord-cutting and streaming .
“But we believe the world isn’t abandoning advertising, and someone has to measure it,” he said. Nielsen has a new technology that can determine whether commercials are being played in different kinds of media.
“We think it will be received well,” Bobrinskoy said.
Last week, Nielsen rejected a buyout offer from a consortium including activist investor Elliott Management.
“We think a deal will eventually get done, but if not, Nielsen has an attractive valuation at 11 times forward earnings,” Bobrinskoy said.
All-cap Focus Fund, with assets of $74 million, has generated a total return of 3.74% year to date through March 23 and 9.67% annualized over the past five years. That compares with negative 6.19% and 15.77% for the S&P 500.
