To Our Investors and Friends,
The S&P 500 Index sold off in the first month of 2022, closing down 5.3%. Oil rocketed higher as a COVID-19-related slowdown failed to materialize and fears of a Russian invasion of the Ukraine fueled demand for the commodity, closing up 17.2% to $88 a barrel. The 10-year Treasury bond increased 27 basis points in January to 1.79%, while short-term rates jumped even higher to narrow the 2-year to 10-year bond spread to 61 basis points (from 79 basis points a month ago). Higher oil prices and expectations for significant Federal Reserve (Fed) rate hikes later this year led investors to sell the market, although a handful of positively performing energy and financial stocks helped value hold up much better than growth. The Bloomberg 1000 Value Index fell 0.5% and the Bloomberg 2000 Value Index declined 4.8%. Growth was decimated, especially new companies with exciting outlooks but no near-term earnings. The Bloomberg 1000 Growth Index dropped 8.2% and the Bloomberg 2000 Growth Index shed 12.7% of its value in the month.
We believe that the market has gone too far in discounting the future of the next-generation technology leaders, those that currently dominate their categories and are anticipated to soon convert rapid revenue growth into even faster earnings growth. As has been the case for decades, we believe the market is not good at predicting the earnings power of growth companies soon after they turn the corner on profitability, Tesla (TSLA) being the latest example of this. As recently as the summer of 2019, the market was convinced that earnings would never materialize for the electric vehicle leader. Since this time, Tesla’s earnings power has been revealed. The company has gone from generating more losses than any other auto manufacturer to being the most profitable auto company in the world…a development that has led to a more than 2,000% increase in the company stock price since that summer so long ago.
We think that the growth sell-off over the last three months has created some great opportunities to invest in these next generation leaders. As can be seen in the following chart, technology companies appear to have more profitable business models than other industries, including energy and financial companies. The gross margins of the next generation leaders are materially higher than energy companies, and even higher than current mega-cap technology companies that have a smaller mix of high margin software. This should provide some guide as to how much better returns on invested capital will be when earnings start to fall to the bottom line. Profitability typically ramps up very quickly, and those frightening P/E ratios become far less scary in just a few years. We do not believe that any amount of Fed rate hikes will dramatically alter this probable future.
Past performance is not a guarantee of future results. Financial forecasts shown above are estimated predications of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. There can be no assurance that any Kingsland Investment strategy or investment will achieve its objectives or avoid substantial losses.
Kingsland Investments has always focused on finding what we believe to be the best new businesses the stock market has to offer. Our search starts with identifying companies with high, sustainable revenue growth and high gross margins, elements generally present in great companies. Once identified, we build our positions, becoming more aggressive when the market provides rare opportunities to buy the best at a discount, as it did last month.
All the best to you,
Arthur K. Weise, CFA
*Effective January 12, 2022, the Kingsland Growth Advisors name changed to Kingsland Investments. The views expressed are those of Kingsland Investments as of February 1, 2022 and are not intended as investment advice or recommendation. For informational purposes only. Investments are subject to market risk, including the loss of principal. Past performance does not guarantee future results. The stocks mentioned are for illustrative purposes only and are not a recommendation to buy or sell. There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of future events or results. Investors cannot invest directly in an index.