To Our Investors and Friends,
The S&P 500 Index (S&P 500) declined 19.4% this year as the market exited out of growth stocks and anything that could be hurt by a Federal Reserve-induced recession in 2023. Initially pumped up by the war and fears of shortages of oil across Europe, oil prices closed at a modest 6.7% for the year, ending the year at $80 a barrel. The 10-year Treasury note yield advanced 225 basis points for the year, finishing at 3.88%. Midway through the year, the yield curve inverted and the 2-year Treasury note yield ended at 4.41%, 53 basis points higher than the 10-year Treasury note yield. All the popular indexes declined this year, even as value materially outperformed growth for the second year in a row as energy, consumer staples, industrials and utilities drove returns in indexes. The Bloomberg 1000 Value Index declined by 5.2% and the Bloomberg 2000 Value Index fell by 13.6% for the full year. The meaningful declines in technology and communications services pulled growth down even further. The Bloomberg 2000 Growth Index dropped by 27.2% and the Bloomberg 1000 Growth Index fell by 28.1% over the past year.
2022 was an incredibly difficult year for growth companies as many investors sold their winning stocks of the last decade to buy higher interest-bearing bonds and stable dividend payors including energy, industrials, financials, consumer staples and select dividend-paying healthcare stocks. As seen in the following chart, the top 10% of performers in the S&P 500 were significantly different from those that drove performance over the ten years from 2012 to 2022.
We believe that stock performance is highly correlated with revenue and profit growth over longer periods but may be driven by other factors over short periods. Over the last year, the primary factor driving stocks was both the stability of earnings and dividend yield, which favored the mature industries mentioned above. The top 10% of S&P 500 performers over the last year appreciated on average 44%, significantly higher than the -19.4% performance of the Index itself. This was a group of average growers over the last decade, increasing revenue at the same rate as the average S&P 500 stock over the same time period (296% for this cohort versus 290% for the average index stock). Excluding solar energy company Enphase (ENPH) and shale energy company Diamondback Energy (FANG), this group grew at a 96% rate over the past 10 years.
Also seen in the previous chart, the profile of the top 10% of S&P 500 growers over the last decade has a very different sector profile dominated by technology, consumer discretion and communication services. During the last 10 years, this group experienced top-line growth on average of over 2,000% (more than a 20x expansion) compared to the 290% (4x) expansion of the index and an 88% (2x) expansion excluding these top 50 performers. Over the last decade, this top cohort experienced a price appreciation of 995% versus the average S&P 500 stock appreciation of 300% and the index’s 10-year appreciation of 169%. Contrary to market biases, the index appreciation over long periods does not keep up with the average company’s performance, as large weights tend to underperform and many additions and subtractions to the index are at inopportune times.
At Kingsland Investments, we focus exclusively on discovering and owning what we believe are the great growth companies of the next ten years. We maintain a long-term view and are not dissuaded by the market’s occasional short-term gyrations. Over time, as has happened through most bull market cycles, investors typically shed their slow-growing dividend payors in favor of the new growth leaders of tomorrow. We patiently look forward to that opportunity again in the coming quarters.
All the best to you,
Arthur K. Weise, CFA
The views expressed are those of Kingsland Investments as of January 3, 2023 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.