By Mark Bern, CFA
I was sent a link to an interesting video clip this week of
an interview of François Trahan by Consuelo Mack of Wealthtrack. And, by the
way, I appreciate receiving such links from my highly informed readers. I highly recommend you take the 26 minutes to
watch. Here is the link.
The gist of the interview was that growth companies are in
short supply relative to both the whole market and from a historical
perspective and that this situation translates into a very high probability
that growth companies will continue to outperform the rest of the market. Demand for growth remains very strong from
investors and we are past the cyclical peak for industrial growth. That means, according to Mr. Trahan, that
cyclicals and value will probably lag the overall market for the next couple of
years, or possibly longer.
The economy is still expanding but the rate of growth in the
expansion has slowed. He attributes this
to the mediocre GDP growth experienced since the financial crisis. He never really gets to the cause of the
muted recovery (few rarely do) and indicates that rising interest rates are
likely to keep the rate of growth muted compared to historical norms. This, in turn, is the culprit for the lack of
what are considered growth companies. If
I recall correctly he mentions that there are only something like 80 companies
in the entire S&P 500 Index that could truly be considered growth
companies.
Many of those growth companies are already overvalued
according to conventional valuation methods but because of the strong demand
and lack of supply we can expect at least some of the better run growth names
to continue to rise. He is basically
saying that a market can appear to remain irrational for much longer than a
rational person can conceive.
He also states that based upon where we are in the cycle
that the market is not really so irrational, but rather that it is acting in a
very predictible manner based upon past experience. He likens our current economic condition as
very similar to that of the early 1980s or 1994. If he is right it would mean that we are
about to experience one of the greatest bull markets in history, even though we
are already deeply into one of the longest bull markets in history. This one may be long in the tooth but the
indicators, again according to Mr. Trahan, tell us that we still have a long
way to go.
If you doubt his theory then take another 25 minutes or so
to watch this video
about the very long-term technical view of the market. This one opened my eyes to the possibilities
that we are not as close to the top as I had once thought. Taken together, these two videos should open
up the minds of those investors who (like me less than two years ago) that the
best may be yet to come.
Of course, an all out trade war could bring everything to a
screeching halt but until it moves from heated negotiations and smallish, tit
for tat tariff moves I will continue to ride what appears to be a new upward
trend. As an illustration just let me
show what a concentrated model portfolio of growth quality companies (as
identified by the Friedrich alrgorithm) has achieved lately:
The Friedrich Final Four performance (in
red) since its inception on August 7, 2017 = +61.72 (+3.93% this week)
S&P 500 Index performance (in blue)
since August 7, 2017 = +12.16% (+0.14% this week)
2018 Friedrich Final Four performance =
+35.36%
2018 S&P 500 Index performance =
+3.50%
It would appear that growth is in charge
and selectivity is key to successful investing for the time being.
Disclosure: I am affiated with Friedrich
Global Research which is a subscription service providing analysis on 20,000
stocks from 36 countries around the globe.
I use the Friedrich algorithm in my stock selection process when building
client portfolios. The system focuses
primarily upon growth, free cash flow and consistency of (superior) results
over time.
Anecdotally, it appears that the analysts
featured in both of the above links are right, at least so far.
Respectfully,
Comments
Post a Comment