A change of leadership in the market?

Small and mid-cap growth stocks are taking the lead… why it’s a lucrative combination… the signals Luke Lango is seeing that suggests it could be a lasting change

In its update from Saturday to Early stage investor subscribers, Luke Lango drew attention to something interesting that happened last week …

For the first time since May, growth strategies of small and mid caps have crushed the performance of value strategies – and even growth strategies of large caps – over a period of several days.

In other words, it wasn’t just a one-day jump when small and mid-cap growth stocks soared. We’ve had a lot of those one-off days before.

What happened last week – and actually started two Fridays ago – is a a multi-day outperformance on growth stocks which has been very rare since February.

So why was it so bad? And what is the broader meaning?

Well, the bottom line is that this could indicate that we are entering a market where small and mid cap growth stocks are about to soar. And historically, it’s a recipe for significant wealth creation… fast.

But to complete the details, let’s step back to make sure we’re all on the same page when it comes to small caps versus large caps and growth versus value.

*** The Simple Calculations Behind Small Cap Gains Versus Large Cap Gains

To anyone less familiar, the term “cap” refers to “market capitalization”.

It is a measure of the size of a stock, representing the total market value of a company’s outstanding stock. You calculate market capitalization by multiplying the total number of outstanding shares of a company by the market price of one of those shares.

At one end of this market capitalization spectrum, you have tiny, nano-cap stocks. These stocks have a market capitalization of less than $ 50 million.

On the other side, you have mega-cap stocks. Here, we are generally talking about a market capitalization greater than $ 200 billion.

However, these figures do not adequately reflect the immense scope of this range. The difference between a small cap stock and a large cap stock can be huge.

Take a small cap with a market value of $ 500 million.

Compared to Apple, this small-cap stock is only 0.02% of Apple’s market cap at $ 2.5 trillion.

Another way to look at it is that to match the size of Apple you would have to amass 5,000 different companies with a market capitalization of $ 500 million.

Now, large caps can be great investments. In many cases, these are stable, established and profitable businesses that often pay dividends.

But if you’re looking for explosive growth, you don’t want to look to large caps. You want to look to small and mid caps.

Our CEO, Brian Hunt, wrote an essay about it. Here it is, explaining the reasoning:

Small cap companies have a much greater potential to produce giant returns for their shareholders in a short period of time than any other type of company.

The reason is simple.

It’s much, much easier for a young $ 500 million small cap to multiply by 10 than it is for a mature $ 500 billion giant to multiply by 10.

It’s just basic math. If your daughter has sold 10 boxes of Girl Scout Cookies around the neighborhood herself, you could probably help her increase her results 10-fold (by selling 100 boxes) by driving her around and putting a little pressure on your friends or colleagues to buy boxes. .

What if your daughter was a natural salesperson and had sold 100 boxes on her own? To enjoy 10 times the growth in this scenario, she would have to sell 1,000 boxes. It’s not that easy anymore. It’s the mathematical challenge to take advantage of giant growth when a business is already making giant sales.

Now, we’ll come back to market caps in a moment. Let’s first move on to growth versus value.

*** Different market approaches for different goals and temperaments

There are many different market approaches, but perhaps the two best known are “value” and “growth”.

Value investors look for stocks that they believe are trading for less than their real value. You can measure this price discount in a number of ways – relative to earnings, maybe assets, maybe cash flow.

The idea is that when the market realizes that a stock is undervalued, investors rush in, pushing the price up. The value investor who has already invested in the stock benefits from these price gains.

On the other hand, there is a growth approach. As the name suggests, a growth investor looks for a company that they believe will experience faster than average growth.

The idea here is that this rapid growth will justify a high and growing market price.

Neither approach is better. They each have their moment in the sun as investor mood and market conditions change over the years.

You can see it in the table below. From 1928 to 2019, green lines indicate years in which a value-driven approach has outstripped growth. The blue lines show when growth beats value.

Source: Dimensional.com

As we have just said, neither of the two approaches is fundamentally superior. But taking the right approach for a given market condition is important if you want to maximize your returns.

*** Let’s go back to Luke’s analysis from last week

For the most recent Digest readers, Luke is our hypergrowth expert and the analyst behind Early stage investor. Its specialty is finding market-leading technological innovators who are at the forefront of explosive trends, capable of generating disproportionate investor wealth.

As we noted at the top of this DigestLuke has just drawn attention to what could be a change in the current market situation – in particular, a change in which growth strategies of small and mid-cap companies are taking the lead.

Historically, the combination of small and mid-cap stocks, with a market environment that favors growth stocks, has been a powerful way for investors to quickly rack up huge gains.

So, are we witnessing a changing market?

Here is Luke:

It is too early to say for sure, but we believe the data is trend in our favor.

There have been a few important developments this week that we would like to highlight:

  1. Yields have gone up and our stocks have gone up. In 2021, rising bond yields were the bane of our portfolios. But this week, yields have risen and our stocks have rebounded. We think this is indicative of the fact that rising yields are not bad for our stocks. A sharp rise in yields would be bad for our stocks. But the gradual increase in yields to still absolutely low levels – which we have today – is actually a positive wind for our stocks.

Second, Luke shows how, last week, mid-cap growth stocks rose even on down days for the broader market. The term for this is “behave well”. This shows that this type of action is always in demand even with general market weakness.

Third, there is the “Goldilocks” environment created by economic data.

Let’s come back to Luke on this point:

This week, Markit’s manufacturing and services purchasing managers’ indices (PMIs) both fell to multi-month lows and missed expectations, but still signaled strong expansion.

Meanwhile, new home sales topped estimates, but jobless claims missed estimates. Second-quarter economic output (GDP) was revised up, but economists expected a higher revision.

Clearly, the economic data today is mixed. There is good and bad. But this neither too hot nor too cold “Goldilocks” type of data is perfect, as it will simultaneously support the expansion while keeping the Fed on the sidelines.

I will add that this morning brought news that the August payroll figures were woefully below estimates. The increase was 374,000, while the forecast was 600,000. “Not too hot” is correct.

Then Luke points to the $ 3.5 trillion budget resolution and $ 1000 billion infrastructure plan that looks like it’s on the verge of becoming a reality. If enacted, huge sums of money will go to the technology sectors that are home to many small and mid-cap growth companies.

Finally, there is the recent realization that a Fed tapering will not immediately translate into higher interest rates. Luke says, “The result will be a zero interest rate environment until 2023.”

So what’s the end of all of this?

Here is Luke’s perspective:

Overall, we’re not going to say this is the inflection point we’ve long been waiting for when growth stocks take back the lead on Wall Street.

But things are improving right now, and while we have always been very optimistic about the long term outlook for our stocks, we are also becoming increasingly optimistic about the short to medium term outlook.

*** How to position your portfolio in the conditions of small and mid-cap growth stock markets

Two weeks ago Luke hosted a special live event called “1 to 30 Summit of Wealth”Which was about cutting edge technology and how to invest in it. The type of stocks he identified falls into this category of “small and mid cap growth”.

Over the next two weeks, the portfolio soared.

Currently made up of nine stocks, this “1 to 30” hyper-growth portfolio is already showing double-digit average earnings. One of the posts has already achieved 40% growth.

On the defensive part of the portfolio, only one position is in the red, down by not even 2%.

Perhaps most impressive, Luke posted his final pick two days ago. This title is already up 11%. As we noted earlier, this is the kind of rapid and significant wealth creation that can occur when market conditions favor growth stocks of small and mid-cap companies.

To learn more about Luke’s portfolio, click here. In the meantime, as we have more confirmations of the potential for a lasting change in market leadership, we will update you here in the Digest.

Have a good evening,

Jeff Remsbourg

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