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Fastest Growing Companies: Q2 2022 Trends

July 21, 2022

Is oil the new FAANG? Are we still in a tech-wreck? Learn why data is so powerful in stock selection, what unexpected growth trends we've uncovered, and how growth isn't always found where investors look for it.

EYE ON THE STOCK MARKET: EPISODE #2 - TRANSCRIPT

Welcome to our Eye on the Fastest Growing Companies segment featuring stock market commentary for the data-driven investor. Marc Zuccaro, Managing Principal of Golden Eagle Strategies, shares what the data tells is happening right now. Marc has focused on institutional design of algorithmic systems for two decades.

QUESTION 1: Tell me about how you see the world as stock scientists.

The way we analyze the markethas always been grounded on data, which allows us to understand what'shappening across the spectrum of growth stocks. We've always focused on achieving a process-driven approach to analysis, which ultimately makes ourinvestment approach repeatable and scalable. Now, growth stocks have a longhistory of outperforming value stocks, particularly when you know which areasto look at, and particularly in areas that many people don't traditionallyassociate with growth, but where attractive ideas for investing can be found.In our day-to-day work, we use a data and rules-based process to find high-growth companies. But we're not looking at fundamentals or othersubjective measures. Our approach is specifically top-down and ultimately dispassionate about the group of stocksthat we analyze. So, we don't have to rely on any guesswork. As our ownresearch has shown, and also research from many other practitioners over thedecades, earnings growth is the best predictor of future price performance. Andwe really use that as the core of our process.

 

QUESTION 1: Why is the concept of growth so important to Golden Eagle Strategies?

As we look at growth, we'renot looking for inefficiencies in the market or market timing elements butreally looking for the traits that are correlated with the highest-performing stocks over a period of time. Now, let's talk about thebig picture first. Investors have a habit of looking at investments bybucketing them. That's a natural human way to organize things in our minds. Asan example, think about the Morningstar grid, the Morningstar grid posits growthversus value on a spectrum and then combines that with a market cap spectrum. Wherea stock's dot falls on that grid tells you what bucket it's in and where it'sprobably going to live for a while. Now, sector exposure is another bucketthat's relied heavily upon as investors try to balance their picks or theirmanagers across different parts of the economy. Now, that's all fine, but it'ssomewhat arbitrary, and it's not particularlydynamic. In the growth versus value debate, performancecomparisons typically rely on indices or baskets of stocks that are chosenbased on a stock's attributes specific to one point in time, and they're not frequently updated. For example, most peoplewould consider the stock of a high-tech company a growth stock. Fair enough.But is that stock or the group that it's in always in a growth mode? No. Eachsegment of the market has its ups and downs, and we try to be cognizant of that. What we do is we ignore the common buckets, and wereally let the data show us what a growth stock is at any given point in time.Once we have a universe of stocks that we're interested in, and we call thatour growth leaders list, then we can use our own process to decide which onesare the best bets.

 

QUESTION 3: What does the universe of growth stocks look like? And how is it different comparied to common perceptions?

Our process tries to uncoverwhere growth is happening now. One of the slogans that we use is we seekperformance now, not later, because we're not trying to predict when a companymight grow by looking at its fundamentals or anything like that, but we areinterested in its current performance, and we do that by screening the wholeuniverse of equities. So to illustrate the point using the traditional bucketsthat I mentioned before, if we look atsectors, there are some sectors which are fairly consistent, and in terms of the number of stocks which appear to be high-growth stocks, I'm talking about financial stocks, industrials,materials, utilities. Each of these groups are consistently represented in ourlist of high-growth companies, even if they don't comprise the majority. But where itgets more interesting is in some of the sectors where you see growth come andgo. And here I'm talking about consumer discretionary healthcare, energy, andoccasionally, even technology. Each of these sectors has distinct waves andgrowth shifts across them. I think the typical mentality is that growth stocksare more aligned with technology industries. And I think many people also thinkthey're more aligned with small-cap or mid-cap companies that might be going through a high growth phase,as opposed to a larger, more mature large-capcompany. But one of the really interesting things that we've seen certainlyover the past five to ten years is astechnologies become more and more a significant part of the economy, growthstocks are found in a lot of areas that are not traditionally associated withgrowth. You see a lot more large-cap stocks,even mega-cap stocks, which are consistentlyaccounted for in our list of leading growth companies. Now, we don't want to bewed to the idea of growth only occurring in certain places, we want to gowherever the growth is. So, tech frequently has the highest number of high-growth stocks, but that's notalways true. And certainly, the first half of 2022 has been a very robustexample of tech not performing to its usual standards. But ultimately, our goal is to monitor where growth is occurring andslowing by using a data lens, and our abilityto harness that info gives us an edge by not being too focused on a sectorwhich may be going through a period of substantial underperformance.

 

QUESTION 1: What trends have you been seeing this year?

Let's talk about 2022, whichhas been a very sobering but interesting year when it comes to growth.Technology stocks, whose earnings exploded during 2020 and 2021, started to disappear from our growth leaders list latelast summer in 2021. Huge earnings gains by these companies during the pandemiccreated very difficult comps, and the growthrates temporarily slowed, leading to them falling offthe list. Coupled with some other well-known market news over the past fewquarters, tech has been completely savaged so far this year, and the drawdownsare huge. Common household tech names are down 40, 60, sometimes 90% year todate, so well off their highs and a lot of ground to make up in the future. Atthe same time, another interesting thing that has happened is energy stockshave spiked on our list. And that began in quarter three of last year. Theenergy sector was one of the few bright spots in the first half of this year.Energies are pretty interesting because it'snot something most people traditionally think about when you're talking ofgrowth stocks. But it's consistently a high proportion of the number of growthstocks that come through our screens. Right now, we are at the beginning of anearnings cycle and second-quarter earnings arestarting to come out. This is the period when our list typically shifts themost, and we're monitoring for the next legs in the market. What I would expectto happen is that energy, which has been the leading growth stock sector forthe past couple of quarters, will start to turn and come down as the promise ofoil going to even higher prices wanes. I think we'll see a shift back towardsthe traditional industries and sectors, which are normally considered growth-oriented. Since the 2022-21 comparisons should be easier than 21 to20. And another thing to keep in mind is we've just come through a huge wave ofgrowth stocks, where the list of tech and service companies that qualified ashigh growth really exploded during the pandemic,and our list almost quadrupled at times compared to typical historical levels.But we're starting to return towards normal levels and this helps put the focusback on areas of the economy which are truly generating consistently highgrowth and we'll start to weed out the outliers that really got a pandemic-only bump.

 

QUESTION 5: As we look ahead, what are some of the things investors should keep in mind?

To avoid restating too much ofthe obvious, investors should not beconsidering getting out of the market now. This is something that happensduring almost every big market drawdown or bear market, where investors startto pull their money out of stocks at the absolute worst time, which is towardsthe bottom. The important thing in maximizing your long-term returns is to notmiss the bounce-off of the bottom. And even though the news is bleak now, andnobody's put their head on the block to call out a market bottom, it's reallyimportant that people keep perspective that the market is much more likely totake a big jump up than to have a big drop down. So, from this point forward,if people are in the market, they should continue to be in the market. And ifnot, they should start to think about scaling back into the market.

Another thing we've heard alot about is style drift among managers. Even long-short managers have gotten incredibly bruised this year, andthey are reacting to that and trying to figure out how they can clawback return in the second half of the year. And thathas led to either intentional or unintentional change of tactics from whatthey're meant to be doing over the long term. And that's another great way todamage your returns is to change what you're doing and change your investmentstrategy just because of the market conditions. So, it's important to stay thecourse with your investment plan.

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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.

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