To Our Investors and Friends,
February saw a continuation of the robust performance that the market experienced in January. The S&P 500 finished up just shy of 3.0% for the month and is now up a little more than 11.0% year to date. For the month, oil prices (WTI) rebounded 6.4% to just over $57 a barrel. The 10-year Treasury Bond advanced eight basis points to 2.71%. The spread between the 2- and 10-year widened 3 bps to 21 bps and remains modestly inverted at the short end of the curve. The new economy, represented by the Russell 1000 Growth and Russell 2000 Growth indexes, recovered 3.6% and 6.5% for the month, respectively. Both continue to advance faster than the Russell 1000 and 2000 Value indexes.
The market’s advance YTD continues to be driven by growth companies, as modest inflation favors unit growers (emerging businesses) over those companies dependent on price increases (mature businesses). The millennials favor these emerging businesses and are making decisions that are benefiting the “new” over the brick and mortar dependent competitors. Advances in technology are disrupting more capital-intensive businesses across industries. Often, the disrupter offers a solution that is an order of magnitude better (measured in price, easy of use, or speed) than what it is replacing. As suggested by the Life Cycle of Companies chart below, I believe millennials are accelerating the growth of the next generation blue chips, causing the previous generational blue chips to deteriorate faster. It is good to be a growth investor!
Life Cycle of Companies
On the evening of the last day of February, Tesla (TSLA) announced that it will rollout the $35,000 Model 3. This is the first step in EVs taking over the auto market, but instead of a surge in the stock, Tesla was sold off. Why? The company also announced there would be some near-term pain in order to make this a reality. It reminds me of IPG Photonics (IPGP), the leader in fiber lasers, that made a similar move ten years ago. Like Tesla, IPG Photonics needed to lower the price of their more efficient laser to get the CO2 laser users to start adopting the new technology. Fast forward a decade: IPG Photonics shares have advanced by over 1,000% in a resounding display of appreciation for their growth strategy. Humans are predictable. They are going to adopt the faster, cheaper, and easier to use technology that Tesla has introduced. I am going to buckle up and enjoy the ride. I know there are a few people who are paying attention…oil sold off as well.
It is worth mentioning that the KGA Long Term Growth strategy is off to a very strong start at the beginning of the year. While working in the mutual fund world, I noticed that our award winning performance was driven by just a handful of stocks. In fact, approximately 5% of the names generated 50% of the returns. In developing this strategy, I intentionally overweighed the transformative companies, those that I believe have the ability to advance 500% or more in the next few years, so that they represent the vast majority of the portfolio. So far, that is proving to set Kingsland Growth Advisors on the right path. I welcome the chance to guide you on this journey into the future.
All the Best to You,
AKW