Prepare for a Corporate Earnings Slowdown With Stocks

Jeffrey Ubben, the head of activist fund ValueAct Capital laid out the case for why he's putting his money in M&A and corporate spending, with the expectation that it will drive future revenue growth, something he expects to become increasingly rare in coming years.

"The scarcity in two to three years is going to be absolute growth," said Ubben during a panel discussion at the IMN Active-Passive Investor Summit in New York. After reckless corporate M&A and spending habits in the early 2000s, "investors are on the other end of the spectrum. They are afraid of capital expenditure, research & development; they just want more buybacks."

Speaking in between activists who profited from recent divestitures by Barnes & Noble(BKS) and AOL(AOL) and legendary activist Carl Icahn, Ubben presented Adobe(ADBE) as a tech turnaround that's poised to see top and bottom line earnings grow in coming years, pulling it from a perceived status as an underperforming PC-based Silicon Valley dinosaur.

Ubben, who holds billion dollar investments in Adobe, Motorola Solutions(MSI) and Valeant Pharmaceuticals(VRX) among a portfolio of 14 stock positions with a value of roughly $7.5 billion, according to Bloomberg data, also told conference attendees to consider oil services giant Halliburton and commercial real estate manager CBRE(CBG) as other turnaround stories to watch for.

Taken together, the tone in comments from Bianco of Deutsche Bank and Ubben of ValueAct may give good reason for investors to seek out turnaround stocks and companies with favorable trends that may help them outperform a general earnings growth slowdown.

Already, in spite of widespread beats, earnings season is beginning to trend negatively, notes Bespoke Investment Group in a May 3 Web post. Over the first ten days of earnings season, the percentage of companies beating earnings estimates remained at near 10-year highs above 70%, but in past two weeks, the beat rate has declined to 64%, not far above a historical average of 62%. Watch to see if the trend continues, cautions Bespoke.

Investors looking for sectors that will sustain 10% to 15% growth should consider technology and industrials, according to Bianco of Deutche Bank. "Tech and Industrials should still deliver 10-15% EPS growth but the recent outsized growth contribution from certain companies in these sectors should become less dramatic," he adds.