“It is important to understand that aggressive growth stocks … are cyclical, and the highest growth rates are not always found where you might think they would be found.”
Growth Stocks Are Cyclical In Nature
Growth happens in different sectors or industries at different times. If we look at the pandemic period, which is an extreme example of a period where growth varied widely across the different sectors, we saw the market bifurcate into two distinct areas. Technology and consumer goods stocks exploded because of the increased demand for both technological solutions to deal with the pandemic and also because people were just simply buying more online because they spent more time at home and turned to shopping online as a way to pass the time. Conversely, in the travel and entertainment sectors, you saw stocks go through the floor because there was very high concern that a lot of these companies might actually not make it through the period.
Growth Happens In Different Sectors Or Industries At Different Times
So, what you have is different stocks of different sectors, responding to different ways to the market environment, and that creates very disparate growth rates indifferent sectors. Typically, what we hear about when investors are talking about aggressive growth stocks, they tend to be focused on stocks that they know about, or sectors that they know about, which are frequently represented by companies that make the headlines. The FAANG companies (Facebook, Amazon, Apple, Netflix, Google), biotech companies, a lot of funds that invest in aggressive growth stocks stick to these sectors because they perceive those sectors to offer the highest concentrations of high-growth stocks. In actuality, there are a lot of other businesses and industries which offer opportunities for high growth.
If you look at aggressive growth historically, you see it's not concentrated necessarily in IT or consumer discretionary at all. They tend to be very cyclical, and the stocks that are in those sectors that gain the most attention have set the tone for what aggressive growth is. But what we found is there are a lot of companies that would never be household names. You find them in the energy sector, oil production, midstream companies, which generate very high growth rates, and which deliver very high returns, but they don't necessarily make the headlines, and they're not in everybody's head as the obvious places to invest. It is important to understand that aggressive growth stocks, the nature of investing, aggressive growth is cyclical, and the highest growth rates are not always found where you might think they would be found.
We are agnostic to industries. In fact, we're uncorrelated to most managers, and we're uncorrelated even in our investment style. We're agnostic to industry. We're agnostic to PE. We are agnostic to investment class, meaning that we have no bias toward large-cap or mid-cap, or small-cap. We simply follow the fastest rates of profits growth wherever it lies. We are also agnostic to stock market forecasts. But actually, in 2018, the New York Times did a piece, and they talked about the horrendous forecasting record of Wall Street. That's one reason that we don't pay attention to Wall Street. We are also agnostic to earnings surprises.
Why be agnostic to industry, PE ratios, market capitalization, stock market forecasts, and earnings surprises?
The investment business is upside down at the moment. When I came into this business, the quarterly reports always focused on the magnitude of sales growth and the magnitude of profit growth. Today the entire focus falls on how much a company beat its sales forecast, beat its earnings forecast, and beat its profit margin forecast, with no mention on how fast or how slow earnings are performing.
The tail is wagging the dog right now in the investment business, and that's one reason why over the past 15 years, 92 out of every 100 funds have failed to keep pace with S&P 500 performance. One of the reasons that the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks did so poorly last year, it's supported by a change in fundamentals. The FAANG stocks have led the stock market over 10 years, ending 2021, and they produced returns on a cumulative basis. Tesla went up 1,900%, and Nvidia went up 9,000%, Netflix 6,000%, Facebook 1,000%. Apple went up over 1,000%. This is never going to happen again. Over that 10-year period, ending 2021, Google expanded its earnings on an annualized basis 23%, Amazon 27%, Netflix 27%. Tesla had the highest rate of return, up more than 10,000%, but also, demonstrated the fastest rate of profits growth growing at an unthinkable rate of 39%annualized. Nvidia compounded at 24%.
What has happened in the latest quarter from those high double-digit rates of regain? Google's profits went up 6%. Apple's profits went up 8%. Facebook actually declined 4%. Microsoft dropped 2%. So, we are never going to see the rate of earnings growth, and the FANG companies that we have in the past, they're mature companies. At the end of last year, they were among the ten largest stocks in the S&P. When you're among the ten largest stocks in the S&P, it means you've reached maturity, and you never grow to those rates of gain again. Going back over the way to, let's say, 1940, the biggest companies and the most profitable companies in the S&P, at one point, Singer Sewing Machine was number three in the country, US Steel was number one, and General Motors was number one. In the 1950s, one of the largest ten companies in the S&P in 1952 was US Shoe. So once a company attains that stature, it means they will never be market-leading companies again in terms of stock price performance. There are no great industries for eternity, but these things do evolve.
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This transcript was generated by software and may not accurately reflect exactly what was said.
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.