Introduction to the US Leaders Growth Strategy

In this article we are describing key principles behind our US Leaders Growth Strategy that was launched in August 2019 and has shown positive results since then outperforming the S&P index by 44% as of the date of this article (13 July 2020).

The strategy is based on our theoretical research and as well as back-testing on different time-frames which turned to be indeed successful. We have also managed to fine-tune it so that the strategy could work semi-automatically. Without further ado, let’s get down to the strategy.

Actually, investing in growth companies is cool!
For the last four years growth companies index has significantly outpaced value companies index, +71% vs +28% respectively.
Meanwhile IT-companies EBITDA share has grown from 9 to 24%.
Only 5 companies — Facebook, Amazon, Microsoft, Apple and Google, accounted for 10 out of 14% of the average 10-year S&P yield.
Generally, growing companies tend to grow further, while falling ones usually continue to fall (how brilliant you would say!).
  1. When a company grows rapidly (more than 15% per year), in 66% of cases it continues to grow rapidly next year.
  2. When a company demonstrates growth rates lower than 5%, in 58% of cases it grew lower than 5% last year.
(In the mathematical terms we can say that results of consumer companies are auto-corellated — for example, if we take 1500 largest US public companies, correlation among revenue growth in current period and previous period is 74% - that’s high!)


Basically, it sounds like a good idea to invest in growth companies. So what can be the problem?
1
Quite often growth companies stop being "growth companies"
This was the case with Motorola, IBM and many others. But, as our research has shown, if you close your long position when growth shows first signs of slowing down, you would likely avoid substantial losses.


2
Growth companies frequently tend to be overheated and holding them seems to be not a good idea either
One of the best examples is the dot-com bubble of the 2000s. Microsoft and Cisco had all-time high multiples which predetermined their stocks dramatic falls. Falling multiples and share prices of Amazon and Netflix in 2018−2019 is a more recent case


So that means that it’s better to hold growth companies when they show no signs of growth slowing (or even better show growth acceleration) and together with that cost not too high.
Our proprietary strategy solves the issues above in the following way:
1
We take top-30 S&P companies by market capitalization being neither commodity nor financial companies
2
Based on quarterly results investments are made only in those companies which in the last quarter:

  • Demonstrate year-to-year average financial growth rates (revenues and EBITDA average) higher than median ones for the last 3 years.

  • By EV/EBITDA multiple cost not higher than 75% percentile of such multiple shown for the last 3 years; we calculate share price potential for the company to reach this historical level
3
Following this approach we find positive anomalies when company's growth rates exceed its historic levels and at the same this company doesn't cost a lot yet.
Backtesting results
We have applied strategy back-testing based on the market data for the last 10 years and the strategy has shown great results.
Great returns — on average >2x times exceed the stock index.
Dropdown is comparable to investing in index
In 2008 the strategy would have shown negative results, but then it would have rapidly rebounded and eventually outperformed the index.
Actual back-test is presented below
Year Strategy S&P 500
2015 21.1% -0.7%
2016 5.3% 9.5%
2017 49.8% 19.4%
2018 -2.6% -6.2%
2019 34.2% 28.9%
2020 7.0% -2.8%
Average 19.5% 8.2%
Total 167.4% 54.4%
Return by year
Approximate backtest run on the period 2008−2014 shows following results:
Approximate backtest run on the period 2008−2014 shows following results:
We are open for further discussions/questions!
Actual results