To Our Investors and Friends,
The S&P 500 Index (S&P 500) increased 5.2% in the month of April and is off to a robust start to the year. Oil prices rebounded 7.5% in the month to almost $64 from $59. The 10-year treasury bond was relatively flat for the month at 1.65%, as was the spread between the 2- and 10-year, ending the month at a still high 149 basis points. Small cap stocks were relatively flat, while larger companies performed better. The Russell 1000 Growth Index charged ahead 6.8% as technology reasserted itself on strong first quarter earnings results. The Russell 1000 Value Index increased 4.0% in the month, while the small cap Russell 2000 Growth Index was up 2.2% and the Russell 2000 Value Index was up 2.0%.
Cyclical stocks have performed much better than secular growth stocks this year, leading many investors to question whether trends established last year will continue in the future. In search of answers, we decided to revisit a favorite investing book, William O’Neil’s How to Make Money in Stocks, A Winning System in Good Times or Bad. O’Neil studied the traits of the top 600 stock performers from 1950 until 2000 (stocks that achieved gains of hundreds or thousands of percent during their growth runs) and found similar traits among this group. Namely, these companies exhibited a persistence of strong revenue and earnings growth.
The stock market is currently rewarding “recovery” stocks that are exhibiting a sizable bounce from incredibly depressed revenue and earnings levels in 2020. Using William O’Neil’s methodology as a guide, we would argue that it is far more important to examine the recovery from 2019 (the last healthy year) to 2021. If the total number is nicely positive, then the business is truly recovering. If it is still off the 2019 levels, then the market is giving credit for a recovery that may not happen. The next several quarters will help set the stage for what the economy will look like in the future. We will be paying close attention to how potential leaders that revealed themselves last year develop in 2021 and adjust our portfolios accordingly. The next few quarterly results will be crucially important in determining this.
In his book, William O’Neil correctly points out that “industries of the past offer less dazzling possibilities.” He follows with a list of industries, including material companies, transportation companies, energy companies, and department stores. Not surprisingly, these older industries are leading the market this year. We think history will show that such leadership is fleeting, as many of these companies are at the same stock levels that they first achieved decades ago. O’Neil’s industries of the future list include businesses tied to ecommerce and the internet, biotechnology, and software…. the groups that are underperforming this year. Although it is unclear how long this underperformance will last, we are feel confident that they will return to sustainable leadership before too long. Once they find a better solution, humans tend to stick with it, suggesting that a return to the 2019 way of doing things is highly unlikely.
At Kingsland Growth Advisors, we will continue to search for and own what we believe to be the best growth companies. Investors will love these companies some of the time and favor cyclical companies or dividend stocks at other times. We think these robust business models will produce strong stock performance for the underlying shares over many years. With a long-term horizon in mind, we believe the current pullback in growth stocks affords a rare opportunity to buy some of the best companies out there at relatively attractive price levels.
All the best to you,
Arthur K. Weise, CFA