1. Aggressive growth stocks represent upper echelon of growth stocks experiencing hypergrowth (typically 40%+ profits growth or more)
2. Highest growth stocks often outperform over time but can be volatile
3. Volatility considered downside but represents greater potential for high returns
Aggressive growth stocks, quite simply, are stocks that are at the upper echelon of the growth spectrum. They're companies that are growing in meaningful ways, but what you do is you look at the very, very upper end of the growth of the group of companies that are growing, and find the ones that are growing the fastest.
Aggressive growth stocks are stocks that are growing at very rapid rates of growth.
Historically, corporate profits grow by an average of 7% per year. The range of growth stocks, at the way many funds look at these issues, is some funds will focus on companies growing their earnings by at least double the rate of corporate profits, which means 15% per year.
And the rate of profits growth once it goes to a hyper-profit level as defined by a Harvard professor in 2008, meaning profits that are growing at 40% or more, you enter into the aggressive growth realm of stocks. Companies that are growing their sales and profits very rapidly, these are typically on season companies. They've had IPOs in the last 10 or 15 years. They do not pay dividends. They sell at very high PEs, and in some cases, the sales growth is very rapid, but some of these companies are losing money. Apple came public in 1980. They did not make a dime until 2006 during this 26-year period, even though Apple did not make money, the stock went up about 1400%.
The downside to growth stocks is typically considered to be their volatility. While they do go up the most over a longer period of time, there are going to be periods where, for reasons unrelated to the company that may be more macro or market related, that companies where these stocks tend to go down a lot too. A lot of times, when you have a situation where investors tend to be hyper-focused on interest rates or other macro factors – that may have a disproportionate impact on growth stocks versus what their real value is. So, you're betting that you're going to ride it up, but you're also assuming that it’s gonna be a bumpy ride.
If you go back to 1971, the NASDAQ was introduced which linked 5,000 market makers into one system showing all the quotes on any given stock. But I'm going to give you the numbers through the end of 2021. The NASDAQ without reinvestment and dividends (because nobody's done the work to provide or generate a total return index to the NASDAQ) -- that index has been up 161% since 1971, which means $1 grew to $161. The same $1 investment in the S&P grew to $41. Now, what's been driving the S&P over the past 21 years, what's been driving the US economy, and what's been driving the US stock market and the stock markets around the world is the technology sector. And so, because the technology sector comprises many of the fastest-growing companies, aggressive growth has become synonymous with technology. For us, our definition covers a much wider landscape because there are other companies that are growing their companies fast, sometimes in healthcare. Last year, a mundane industry like the energy industry, which historically has been regarded as being in the value style. But oil industry profits more than doubled in many cases last year, and the energy sector was the leading sector in the stock market, producing double-digit positive returns where as the S&P index as a whole declined 19% in 2022.
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Please note, that the thoughts expressed in this podcast are those of the presenter. This is not, nor should it be considered an offer or a solicitation of an offer for investment.