The All-Cap Opportunities Four Pillars Framework, Explained

Transcript

I think the reason that this process is differentiated and durably differentiated is because it’s not as easy to implement as it sounds. There’s a lot of nuance that goes into scoring each of the pillars.

All the pillars are equal, I don’t love any of the children more than the others—but the first pillar is quality. I’m looking for high-quality businesses. … This is more of a judgment based on sitting through literally thousands of company meetings over the last 15, 16 years, learning different industries, getting to know management teams, seeing how industries change over time. What you’re looking for is probably not a surprise. You’re looking for companies that are on the right side of change, companies that are suppliers to winners, companies that have a defensible moat around their business so they have high margins and can sustain them, companies where you trust management, where you trust them to allocate capital.

The second pillar, I call expectations. Think about this as, we’re looking for stocks where there’s positive revisions on the metrics that drives the stock. So, some stocks trade on earnings, some trade on free cash flow, some trade on billings or bookings, subscriber growth. Whatever the metric is, you know, we want to understand if our internal, T. Rowe Price estimates are above or below published Wall Street estimates. How far ahead are we? How confident are we? Over what time frame are we ahead? This pillar is one I could not do without the help of the analyst platform.

The third pillar, getting better or worse. You could also call it acceleration. This is just a pillar where, in the numbers, do you see fundamentals moving in the direction you want them to be moving? Is revenue growth going from 5% to 10% to 15% on a year-over-year basis? Are margins expanding? The rate of margin expansion improving?

I’d say I’ve always been very attuned to valuation. It’s always been very important to me. I try to focus on more traditional metrics: earnings, free cash flow. I try to avoid loosy-goosy metrics that don’t really have anchoring in realty. Focusing on valuation doesn’t just mean buying low-multiple stocks. It just means trying to find stocks that are undervalued relative to their potential.

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Justin P. White Portfolio Manager, T. Rowe Price All‑Cap Opportunities Strategy

Justin White is a portfolio manager of the US Multi-Cap Growth Equity Strategy, including the T. Rowe Price All-Cap Opportunities Fund, in the U.S. Equity Division. He is chairman of the Investment Advisory Committee of the US Multi-Cap Growth Equity Strategy and a vice president and an Investment Advisory Committee member of the US Structured Research Equity, US Growth Stock, US Large-Cap Core Growth Equity, US Mid-Cap Value Equity, and Communications and Technology Equity Strategies. He is a member of the Asset Allocation and Equity Steering Committees. Justin is a vice president of T. Rowe Price Group, Inc.

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