Market Insights & Analysis from Kramer Capital Research

Tech Trumps Growth in This Market

Last week, I discussed the “Sweet 16” stocks that had appeared on my screen. These are the stocks that are growing at a healthy speed despite what looks like a sluggish season for the overall corporate financial outlook.

Think of it as my off-Nasdaq bracket of dynamic Wall Street names with hustle. To use a sports analogy, they all theoretically have what it takes to give investors plenty of scoring opportunities as their fundamentals continue to expand.

After all, the logic is always that a fast player in your portfolio is worth more because it can generate increasing amounts of cash to support a rising market cap. The “earnings” side of the valuation climbs in real time to let the “price” side keep up.

Over the long term, that’s just how the market works. It is why my GameChangers subscribers have been so satisfied over the years as they get access to some of the highest-quality growth stocks available.

But any given season will provide plenty of unexpected drama along the way. Ths is why growth rates in and of themselves haven’t been a perfect predictor of which stocks are going to surge or simply spin their wheels.

Go back to last week’s Trading Desk for the 16 non-tech stocks that impressed me with their expansion rates. These are the dynamic companies that are on track to boost their earnings anywhere from 8 percent to 800 percent this year.

And they’re doing it all offline. This isn’t Silicon Valley with its buzzwords and mysterious profit centers that seem to be hitting so many growth walls lately.

They are definitely a far cry from the typical stock on the market, where all the analysts, after putting their heads together, can’t even find 4 percent growth on the horizon.

In theory, these stocks all should be champions. The preparation of a list of premier growth stocks such as the ones that are recommended in my GameChangers advisory service should be extremely easy. Just run a growth screen to identify those stocks and let the profit follow.

However, the real world of Wall Street makes it a little more complicated. Performance on my Sweet 16 list was decent on the whole (up 2 percent this week, a little ahead of the S&P 500) but individual moves were all over the place.

High-growth prospects such as apparel retail chain Abercrombie & Fitch Co. (NYSE:ANF) and hospital equipment maker ICU Medical Inc. (NASDAQ:ICUI) actually went down despite seeing a level of earnings growth that should at least nudge them up 0.5 percent a week, if not a whole lot faster.

Otherwise, there weren’t a lot of instant rallies on the list. Only two racked up anything better than a 3 percentage-point play. I’ll discuss them at the end of this column because they aren’t the real lesson to take away from this exercise.

Winning the Ground Game

The mood of investors cycles between fear and greed, as well as between defense and offense. Growth is all about offense.

When investors feel confident in their ability to run the court, they want growth on their team. If they feel threatened, their tactics shift to protecting their score and shutting down threats.

That’s when growth stocks get benched. They haven’t slowed down at all, but because all projections have a speculative side, counting on their speed is a risky proposition.

Risk raises tension. Sometimes, you want to ratchet down the tension in order to lower the odds of a big upset taking your team out of the game.

That’s the mood that dominates now. Stocks have run up such a big year-to-date (YTD) score that there’s no real incentive to push for extra points.

It is the kind of environment that favors stocks that can flex in the portfolio. In GameChangers, for example, we are always looking for a little quality alongside the growth profile in order to lower the odds that a player that looks good on paper won’t implode during the game.

Ironically enough, this means that the best-performing non-tech growth stock on my screen last week was American Airlines Group Inc. (NYSE:AAR), a gigantic company with a $45 billion run rate already.

AAR isn’t growing fast in the long term. Its 2019 numbers are largely an illusion that was created by the fact the company missed last year’s tax cut boom. Thus, the comparisons are artificially low.

From a growth perspective, the stock was dead money last year. However, money is flowing into it now because the stock missed the rally.

That’s why AAR is far ahead of everything else in my Sweet 16, soaring 14 percent last week.

I don’t expect the stock to keep moving at this rate. It is not a “game changer” that is disrupting the corporate landscape. In a lot of ways, AAR already is the corporate landscape.

Over the long run, stocks like AAR have lagged behind the real high-growth game changers. Week after week, the edge that faster earnings expansion provides begins to add up.

So far this year, my Sweet 16 and the S&P 500 are evenly matched. But over the last 12 months, the growth bracket has outperformed by 3 percentage points.

Multiply that edge across an investment career and you’re in champion territory. This is also why I love the GameChangers world.

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