Where did all the growth stocks go? Growth strategies for subdued markets

Thursday, Mar 07 2019 by
47
Where did all the growth stocks go Growth strategies for subdued markets

Stock market cycles dictate that there are times when certain styles of investing will seriously struggle for buying ideas. In bull markets, when prices are rising, value strategies dry up. In bear markets, when fast-moving stocks can get pulverised, momentum strategies suffer badly.

Then there are growth strategies. Growth has been a major driver of returns in recent years - particularly in small-cap stocks. But since the middle of 2018, we’ve see a sharp fall in the number of companies making the grade as genuine growth shares investments. So why is that?

Part of the answer is down to the way growth stock strategies work. While these strategies often differ on the finer details, most rely on a few key concepts. First, they look for a growth streak in company earnings. Second, the stocks shouldn’t be too expensive. And third, there should be at least some positive momentum in these shares.

Let’s look closer at these ideas…

Fast and persistent earnings growth

I don’t think you’ll find a regular growth strategy that doesn’t take some kind of lead from a company’s earnings. Historic profitability and the expectation that earnings will keep growing is usually a must.

If you’re a fan of US traders like Mark Minervini or William O’Neil, for example, you’ll be looking for quarter-on-quarter acceleration in earnings growth. If Robbie Burns (the Naked Trader) or perhaps Jim Slater are more your style, then earnings growth should at least be positive over the past year. Meanwhile, others, who take a longer-term view view of “growth at a reasonable price” (GARP) might look for five- or even ten-year positive earnings growth rates.

Growth at what price?

So earnings are important, but what about the price you’re prepared to pay? This issue divides growth investors into two camps. In one, GARP specialists like Robbie Burns usually won’t overpay for a share. A P/E ratio of 20 is generally the ceiling in their kinds of strategies. That would definitely have priced you out of some of the best performing growth stocks in recent years. But it might also have saved you from some sudden disappointments..

Other types of GARP investor, like Jim Slater and Peter Lynch, focused their strategies on the relationship between price and growth. They both used interpretations of the price to earnings growth…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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12 Comments on this Article show/hide all

Jcorsellis 8th Mar 1 of 12
3

Hi Ben, great post. Being a growth (momentum / breakout speculator) the past several months have been difficult. Even when companies have reported good earnings the share price has got hit hard in some cases.

I think one of the main issues is that global growth, including US growth, is slowing. In 2015/16 US GDP was coming out of the 'shallows' and accelerating on a y/y % basis up until Q3 2018. GDP growth has now topped and is slowing, hence why equities, specifically US equities, are struggling. I'm going to do some analysis later on the S&P500 looking at the technicals, we're obviously at a crucial area right now around the 2,800 level. Hopefully I can get images to work on Stocko, otherwise I'll post it on my website. Cheers JC

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john horner 8th Mar 2 of 12

I found the article useful. Our financial club tend to favour momentum stocks

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herbie47 8th Mar 3 of 12
1

Yes it's true there are not so many growth stocks about in the UK market but there are some still performing well such as Ab Dynamics (LON:ABDP), Britvic (LON:BVIC), £D4T4, Future (LON:FUTR), Greggs (LON:GRG), James Fisher and Sons (LON:FSJ), Kainos (LON:KNOS), Qinetiq (LON:QQ.) SDL (LON:SDL), for some reasons the growth screens you mention have not picked them up. So maybe a screening issue in this market.

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timarr 8th Mar 4 of 12
5

In reply to post #456128

... for some reasons the growth screens you mention have not picked them up. So maybe a screening issue in this market.

Hi herbie

That's because the stocks you mention aren't "growth" stocks, they're "momentum" stocks. The only screens that any of them are being picked up on are for momentum. It's interesting to compare the growth and momentum descriptions offered by Stockopedia.

Growth:

This investing approach is focused on selecting stocks that are in the growth stage of their life cycle - a period associated with rapid and increasing expansion in sales and earnings with still-reasonable profit margins.

Momentum:

... an investing strategy of buying prior winning stocks and selling short prior losers based on the fact that investments exhibit persistence in their relative performance.

Growth stocks may look expensive but the aim of the screens is to identify shares which are growing rapidly.  Momentum stocks are usually already fully valued, so you're betting on a continuation of their sparkling performance.

It's just a matter of definition - usually today's momentum stocks were yesterday's growth stocks. But you need a screen to look forward, not back.

timarr

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herbie47 8th Mar 5 of 12

Hi Tim,
I take your point about momentum shares but I think Future (LON:FUTR) is more of a growth share than most of the shares selected. Ab Dynamics (LON:ABDP) is also still forecast to grow more than most of them. The only real growth share on the 2 growth screens I can see is Filta Group (LON:FLTA).

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iwright7 9th Mar 6 of 12
5

The discussion about what is really a Growth stock is key to the success of the approach, because it would seem obvious that a company which is growing its sales and earnings, will increase in price. I recall almost 20 years ago buying/reading all the Jim Slater Zulu books, subscribing to Company REFs and even going on one of Jim's investing courses, all with mixed results. Perhaps the market timing was off, but my conclusion was that it was easy enough identifying a Zulu type Growth company but that the market needed to agree with me. With Momentum investing (at least at the time) the market already agrees. Ian

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RichardEllis 10th Mar 7 of 12
1

Are growth stocks getting hard to find now because corporate earnings are slackening off or going into reverse? Or, is it a case of market psychology due to trade wars & macroeconomic considerations? - Richard

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andrea34l 13th Mar 8 of 12

A well written article, Ben.

With regard to some of the comments made here, I have had a look at the top performing screens for both growth and momentum and I would be a lot more comfortable in holding stocks in the growth screens than in the momentum ones. Number 5 now in the O'Neill growth screen is 4imprint (LON:FOUR) which I hold, which is looking very promising now.

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iwright7 13th Mar 9 of 12

Andrea,

Just worth pointing out the 4imprint (LON:FOUR) has a Momentum score of 98, so it has both Growth and Momentum. Best of both worlds?

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Nick Ray 13th Mar 10 of 12
1

It is very curious. Screens for growth/momentum are finding fewer stocks, and what they are returning are not necessarily performing well. Meanwhile, stocks chosen based on their performance in the first half of 2018 have tended to perform quite well so far in 2019.

For example, an equal-weighted portfolio starting on 1-Jan-2019 based on the NAPS 2018 stock selection would be up +8% so far whereas the NAPS 2019 selection is only up +1%.

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herbie47 13th Mar 11 of 12

In reply to post #457443

Yes 4imprint (LON:FOUR) is coming up on a few screens of mine. As per Momentum v Growth on Stockopedia, I'm a bit split, out of the top Momentum ones that interest me are: James Fisher and Sons (LON:FSJ), Future (LON:FUTR), Diageo (LON:DGE), AA (LON:AA.) Growth, I have held quite a few of them (Boohoo (LON:BOO), Fevertree Drinks (LON:FEVR), IQE (LON:IQE), DOTD, JD.) but have sold them all now, but I would consider Future (LON:FUTR) to be a growth company, look at the earnings growth. Britvic (LON:BVIC) does not look too bad, that has high Momentum. The O'Neil screen has Momentum also.

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Ramridge 13th Mar 12 of 12
1

In reply to post #456158

timarr -
Agree with your distinction between momentum and growth stocks.

That is why Minervini's method stands on two legs. First is that a stock must exhibit a VCP pattern, the 'momentum' part. The second is that it must shown solid fundamentals such as strong sales growth, earnings growth - the 'growth' part. In that order.

The trouble is that over the recent months and in my experience, the few stocks which have qualified in this respect haven't performed well, and in many cases have resulted in losses. Does it mean the system is wrong? Not in the least. To me, it means take time off and go and smell the roses. I am 90% in cash and will remain so until the stock market turns to suit my method.

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