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High Profitable Growth Companies Saw Value Gains of ~10x the Market

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A portfolio of high Profitable Growth companies outperformed the general stock market by 9x over the past 20 years. A portfolio of high Profitable Growth companies yielded the highest coincident return of 19% per year on average.

Learn more at: http://becomeabetterinvestor.net/blog/high-profitable-growth-companies-saw-value-gains-of-10x-the-market/

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High Profitable Growth Companies Saw Value Gains of ~10x the Market

  1. 1. Presented by: Dr. Andrew Stotz, CFA A Portfolio of Only the Highest “Profitable Growth” Companies Grew by 10X the Market Portfolio
  2. 2. 220 September 2016 Sources: A. Stotz Investment Research  Hypothesis 1: A portfolio of high “Profitable Growth” companies in any one year also results in coincident price outperformance in that year  Hypothesis 2: A high “Profitable Growth” portfolio beats a high profitability portfolio and also beats a high growth portfolio Testing “Profitable Growth” and price performance
  3. 3. 320 September 2016 Sources: A. Stotz Investment Research  We started with our World Class Benchmarking database consisting of 27,000 companies globally  20 year time period (Mar 1997-Aug 2016)  We removed financial companies, and were left with 23,500 non-financial companies  We then removed 4,000 stocks that did not have the fundamental data needed for the study Preparing the universe
  4. 4. 420 September 2016 Sources: A. Stotz Investment Research  Each year we only included companies with a market capitalization greater than US$500m  To be included in any one year, the company also needed to have full-year price data in that year Preparing the universe
  5. 5. 520 September 2016 Sources: A. Stotz Investment Research  To eliminate outliers, we excluded stocks that had a price change of more than 500% or less than -80% in any one year  This left us with on average 4,500 stocks per year (minimum in any one year = 1,500, maximum = 8,400) Preparing the universe
  6. 6. 620 September 2016 Sources: A. Stotz Investment Research  We used EPS growth as our measure of growth and return on assets (ROA) to measure profitability  A company that was in both the top 3 deciles of EPS growth and in the top 3 deciles of ROA in each year we called a high “Profitable Growth” company Test the coincidence between “Profitable Growth” and price performance
  7. 7. 720 September 2016 Sources: A. Stotz Investment Research  To test across sectors and size, we created our high “Profitable Growth” portfolio combining the top 3 deciles which had the highest Profitable Growth score in every sector and from each size group  We measured the 1-year price performance ending at each company’s closing period compared to 1 year before Test the coincidence between “Profitable Growth” and price performance
  8. 8. 820 September 2016 Sources: A. Stotz Investment Research  Our high “Profitable Growth” portfolio included on average 500 stocks per year (min = 100 and max = 1,000)  Hypothesis 1: A portfolio of High “Profitable Growth” companies in any one year also results in coincident price outperformance in that year  Hypothesis 2: A high “Profitable Growth” portfolio beats a high profitability portfolio and also beats a high growth portfolio Test the coincidence between “Profitable Growth” and price performance
  9. 9. 920 September 2016 High “Profitable Growth” companies generated almost 10X market return Sources: A. Stotz Investment Research, Thomson Reuters 3,013 1,178 772 342 - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 High Profitable Growth High growth High profitability Universe Mcap-weighted indices (USD)
  10. 10. 1020 September 2016 High “Profitable Growth” yielded the highest return of 19% p.a. Sources: A. Stotz Investment Research, Thomson Reuters 5 10 13 19 - 2 4 6 8 10 12 14 16 18 20 Universe High profitability High growth High profitability and growth Price return from Mar 1997 - Aug 2016Coincident return (%, p.a.)
  11. 11. 1120 September 2016 (60) (40) (20) - 20 40 60 80 High Profitable Growth Mcap-weighted universeCoincident return (%) Only in 2000 did high “Profitable Growth” underperformed the market Sources: A. Stotz Investment Research, Thomson Reuters
  12. 12. 1220 September 2016 High “Profitable Growth” companies beat the market 95% of the time Sources: A. Stotz Investment Research, Thomson Reuters 95 90 95 50 55 60 65 70 75 80 85 90 95 100 High profitability High growth High Profitable Growth Number of years that each group beats the sector peers in the past two decades Winning periods (%)
  13. 13. 1320 September 2016 Sources: A. Stotz Investment Research  A portfolio of high “Profitable Growth” companies generated almost 10X coincident market return over the past 20 years  A portfolio of high “Profitable Growth” companies yielded the highest return of 19% p.a.  Only in 2000 did high “Profitable Growth” companies slightly underperform the market  A portfolio of high “Profitable Growth” companies beat the market 95% of the time What we have learned
  14. 14. 1420 September 2016 Want to Become a Better Investor? Grab Our Free Newsletter BecomeaBetterInvestor.net/join

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