Our Definition of Growth and Value

Our preference for growth or value is based primarily upon S&P profits forecasts and interest rates as well as other indicators. We define a growth cycle as one in which investors are pessimistic about future earnings prospects and therefore gravitate to the top of the earnings food chain. These companies are mostly large caps with dominant market share whose performance in past down cycles has been the best. The Asian crisis in 1997 ushered in the most exaggerated growth cycle in 25 years because of concern for its effects upon the U.S. economy. Our definition of a value cycle is when investors are optimistic about future earnings prospects and S&P profits forecasts are accelerating. They look at the bottom of the earnings food chain because there is presumably enough to go around for everyone.  Investors would rather pay 20 times next years earnings for a company growing earnings at 40% per year than 40 times earnings for a company growing at 20% per year because they believe economic conditions will allow the lower tier company to achieve their growth.

New Technology Companies

We’re not the first to tell you there’s a revolution going on and that the internet is changing the way we do everything. Applying growth and value screens to a new technology company simply doesn’t work. But we cannot turn our back on this segment because to do so would be a great disservice to our clients. About one-half of our research time is spent finding companies who are in leading edge technologies and have a viable business plan. As these companies establish themselves the fluctuations in their stock price can be quite severe. We rely heavily on technical analysis to try and smooth these returns out and cut down on risk.

Is This a “Trading” System?

Because the average length of growth or value cycles over the past 25 years has been 4 years our holding period for the stocks in our portfolios tend to be much longer than mutual funds or pension fund managers.  Most gains our clients take are long term which minimizes their tax liabilities.  However, the ultimate determinant of how long a stocks is held is the market and the length of profit cycles.