Millions of Heroes Have Begun Their Journey

To Our Investors and Friends,

Fears of higher inflation and lower COVID-19-related demand hit the market in the month of November, causing a decline in most stocks, including the S&P 500 Index which fell 0.8%. Oil declined 21% to $66 a barrel as speculators sold positions faster than they built them in the previous month on fears of the Omicron variant. The 10-year Treasury bond dropped 12 basis points to 1.43% as the bond market sought safety, while the spread between the 2- and 10-year narrowed to 91 basis points, a 16-basis point contraction. The short end of the curve has increased in the last two months in anticipation of tightening from the Federal Reserve. Except for a handful of mega cap technology companies, the indexes fell for the month. The Bloomberg 1000 Growth Index declined 0.5%, the Bloomberg 1000 Value Index fell 3.3%, the Bloomberg 2000 Value Index dropped 3.4% and the Bloomberg 2000 Growth Index declined 4.6%.

We don’t think investors will be fixated on interest rate expectations and inflation for long it makes for a terrible story when compared to heroes creating technology to change the world. As explained by renowned professor Joseph Campbell in his book The Hero with a Thousand Faces, the adventure of the hero follows a typical pattern: “separation from the world, penetration of some source of power, and a life enhancing return.” It is a story from which most myths are made and is seen throughout the world, originating from a common human psyche that is as old as civilization itself.

The hero’s journey is present in all great new companies and is why we believe founder-led businesses have more potential than businesses that are managed by a political champion chosen to run most older companies. It is also why we are so excited about the prospects for the disruption of existing businesses and industries over the coming decades.

COVID-19 created a once-in-a-lifetime opportunity for billions of people worldwide to re-examine their lives while quarantined at home. Millions have started the hero’s journey...changing their lives by creating a new business. As can be seen in the chart below, business formation trended higher for years following the financial crisis but exploded to new levels since the emergence of COVID-19.

Joseph Campbell would describe these heroes as seeking out their “golden seed” or bliss…discovering their passions as they look to get more out of life. We believe this shared experience will create millions of heroes that will breathe new life into the world, creating an abundance of growth opportunities. Those companies struggling to attract workers may find it more difficult as hero-driven organizations attract people to their missions and away from boring bureaucracies.

Kingsland Growth Advisors has always been in search of great businesses led by enthusiastic management teams. We believe this passion is necessary to create larger companies and are excited when we discover them. As Joseph Campbell wrote, “birth can conquer death not of the old thing again, but something new.” It is with this view that we will wait patiently for investors to turn away from inflation and interest rate concerns and embrace the heroes of this new world.

All the best to you,
Arthur K. Weise, CFA

Rational Investing

To Our Investors and Friends,

The market rose quicker in October than it fell in September as investors resumed their enthusiasm for stocks once their fears surrounding economic challenges began to dissipate. The S&P 500 Index rose 6.8% in the month. Oil increased more than 11% to almost $84 a barrel, as near-term demand/supply imbalances continue to impact the energy complex. The 10-year Treasury bond rose three basis points to 1.55%, while the spread between the 2- and 10-year narrowed to 107 basis points, a 17-basis point contraction. The major indexes reversed their September losses as company earnings reports supported views of a continued recovery, notwithstanding disruptions caused by supply chain bottlenecks. Large caps led the market recovery: the Bloomberg 1000 Growth Index increased 8.2% in the month and the Bloomberg 1000 Value Index rose 4.6%. Small cap gains were less robust as the Bloomberg 2000 Growth Index expanded 4.4% and the Bloomberg 2000 Value Index rose 3.5% in the month.

The quick fall and rise in the markets over the last two months highlights that once again, market participants overreact to perceived risks. We are all subject to a new reality that in a world of algorithms, fears can be multiplied exponentially. This is based on an old premise, and in fact according to Steven Pinker’s Rationality: What It Is, Why It Seams Scarce, and Why It Matters, “the appetite for florid fantasy lies deep in human nature – people, not algorithms, compose these stories, and it is people they appeal to.” In his book, Pinker explains that “conspiracy theories and viral falsehoods are as old as language” and have shaped our reactions since the dawn of time. The market often is possessed by motivated reasoning, or simply “my side bias” in which select information creates a narrative that supports an individuals’ existing bias. Many market participants are focused on the short-term act on these biases, unwilling to wait to see if the data supports their theories. If anything, quantitatively driven strategies combined with a price momentum driven market likely will increase the number of rapid moves up and down in individual stocks, sectors and the market itself.

Eventually, the market figures it out. “Rationality requires reflectiveness, open mindedness, and mastery of cognitive tools like formal logic and mathematical probability,” explains Pinker. Most people change their minds when faced with rational information – active open-mindedness is a rejection of motivated reasoning. Pinker concludes that better reasoners suffer fewer bad outcomes and have better socioeconomic outcomes. We couldn’t agree more, which is why critical thinking is central to our decision-making process.

The Kingsland Growth investment process originated on the premise that critical thinking must be applied to every decision we make to avoid the pitfalls of the market’s volatile nature. This has led us to focus on businesses, not just technologies. The success of every one of our investments is not dependent on how promising a technology may be far into the future, but on the evidence of whether consumers or businesses are embracing that technology. This is measured in both revenue growth and gross margins over time, which provide hard evidence of how a business is succeeding in the market. Quarterly earnings are the report card of how a business is performing and acts as a guide to how a company is progressing on its path to becoming the next generation blue chip investment that we are seeking. In the end, we believe a long series of strong earnings reports is the path to an incredibly successful stock investment and is the foundation of our investment philosophy.

All the best to you,
Arthur K. Weise, CFA

Investment Advisory services provided by Kingsland Growth Advisors. The views expressed are those of Kingsland Growth Advisors as of November 1, 2021 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.

COVID-19’s Persistence Solidifies Work from Home Trends

To Our Investors and Friends,

A growing number of new challenges that surfaced in September, including the return of COVID-19, inflation fears and a China slowdown, culminated at the end of the month with the major indexes quickly falling a few percentage points. The S&P 500 Index finished the month with its worst performance all year, down 4.8%. Oil increased 10% to almost $75 a barrel, as near-term inflation impacted the energy complex. Inflation fears also drove the 10-year Treasury bond up 22 basis points to 1.52%, and the spread between the 2- and 10-year, widened to 124 basis points, a four-basis point expansion. All major indexes fell during the month -- the most dramatic losses coming in the final few days. The declines were as follows - Bloomberg 2000 Value Index declined 1.1%, the Bloomberg 1000 Value index was down 2.9%, the Bloomberg 2000 Growth Index dropped 3.7%, and the Bloomberg 1000 Growth Index fell 5.4%.

The biggest surprise this fall has been a dramatic resurgence of COVID-19, driven by the rapidly spreading Delta variant in combination with a population that is still not fully vaccinated. In response, many large corporations are delaying mandatory return to the office dates while others are completely rethinking them. According to Joanne Lippman’s recent Time Magazine article, “The Great Reopening”, focused on working from home, many Americans reassessed their priorities while at home and are now quitting their office jobs for ones that allow for greater flexibility. Lippman explains that the modern office position was created after World War II on the assumption that a man went to the office and a woman was largely responsible for caring for the family and home. This antiquated model may now forever be broken, especially given the fact that women now represent 60% of new college graduates and are still largely responsible for raising children.

We believe that entrepreneurship is exploding because the combination of work dissatisfaction (toxic work environments) and new, easy-to-use technology tools make starting a business from home easier than it has ever been. We think that those companies that are either providing these tools or are flexible enough to allow work from anywhere, are at a significant advantage in the post-COVID-19 economy (whenever that happens). Those that are trapped by their physical locations risk seeing margin pressure as they are forced to pay higher wages to attract employees to undesirable jobs. It is especially surprising, therefore, that the market assumes that the world we left pre-COVID-19 will be the same we return to post-COVID-19. This poor assumption likely allows for significant opportunity in new businesses that are not fully appreciated.

At Kingsland Growth Advisors, we spend our time focused on new trends that can create great growth opportunities. The period of the “great resignation,” as coined by an Associate Professor of Texas A&M, Anthony Klotz to describe the post-COVID-19 work culture, should amplify trends that began during COVID-19 and produce great opportunities for patient growth investors.

All the best to you,
Arthur K. Weise, CFA

Immigration led Demographic Change is a Powerful Force

To Our Investors and Friends,

The S&P 500 Index increased 2.9% in August, again led by mega cap growth stocks that posted mid- to high-single-digit returns. Oil fell 6.4% to almost $69 a barrel as both OPEC supply increases and COVID-19 related demand declines pressured the commodity. The 10-year Treasury bond increased six basis points to 1.3%, as did the spread between the 2- and 10-year, ending the month at 110 basis points, a five-basis point expansion. The Bloomberg 1000 Growth Index expanded 3.42% for the month. Both value and small cap indexes performed slightly worse. The Bloomberg 2000 Growth Index expanded 2.38% in the month, the Bloomberg 1000 Value Index rose 2.04%, and the Bloomberg 2000 Value Index increased 1.92%.

Our summer reading included William Frey’s Diversity Explosion: How New Racial Demographics Are Remaking America, a deep dive into one of the biggest drivers of change in the United States. -- demographics. In fact, the US has been moving from a largely white population in 1970 to one with no racial majority expected mid-way through this century (see chart below). More importantly, is the country’s Asian, black, and Hispanic populations are driving US population growth. Immigrants from both Central America and Asia over the last several decades are the primary driver of demographic growth in the United States, as compared to the white population that has been stagnant for decades and is expected to shrink going forward. This demographic change is quite meaningful from a growth perspective. Frey estimates that the buying power of both the Hispanic and Asian populations has gone up approximately 200% in the last 20 years and is now a rapidly growing 17% of the US economy.  

Unlike the stagnating economies of Europe and Japan, the US economy is significantly benefiting from its diverse population. It is clear to us that US companies must focus on all consumers in order to grow. They must also make sure that their employee base is as diverse as their customer base.  “Between 2010 and 2030, the primary labor force age population will experience a net loss of 15 million whites; at the same time, it will gain 27 million racial minorities”. As Frey further explains, “new minorities add needed youthfulness that brings with it innovation and an entrepreneurial spirit.” Those companies that do not embrace diversity are likely to face significant growth headwinds in the years ahead.

As do many books that educate us about the world, Frey’s book encouraged us to re-examine the cultural diversity within our portfolio of companies. It should come as no surprise that our leading investments pursue both a diverse customer base and a diverse work culture. We believe that this diversity strengthens their businesses and reinforces a virtuous growth dynamic that has the potential to pay dividends for years to come.

All the best to you,
Arthur K. Weise, CFA

The Other AI

To Our Investors and Friends,

The S&P 500 Index increased 2.3% in July, driven by mega cap growth stocks that were bought by a market unnerved by the Delta variant. Oil increased 0.7% to under $74 as OPEC indicated their intention to return to normal production over the coming months. The 10-year Treasury bond declined 21 basis points to 1.24%, as did the spread between the 2- and 10-year, ending the month at 105 basis points, a 15-basis point contraction. The Bloomberg 1000 Growth Index expanded 3.1% for the month, driven by growth in the largest tech companies, which were bought at the expense of most of the rest of the market. The Bloomberg 1000 Value Index expanded a modest 0.5%. The small cap indexes were sold off: both the Bloomberg 2000 Value and the Bloomberg 2000 Growth fell approximately 3.3%.

Occasionally, we are introduced to an insightful book that helps us see the world in a new light. Last month, Gillian Tett’s Anthro Vision introduced us to the concept of the other AI….Anthropology Intelligence. In her book, the author applies an anthropological lens to both the finance industry and many leading corporations. An anthropological lens, described by Tett as a lateral lens or “worm’s eye view of the world,” helps provide greater perspective to such notable events as Wall Street’s failure to anticipate the 2008 financial crisis and the unexpectedly deep relationship between consumers and the internet technology they engage with.

Most interesting to us is understanding the social connections that tie people to the world around them. As applied to the internet, Tett reveals that data finds its roots in the plural of the Latin word datum – to give. Data is a gift. The author further explains that gift giving “is endemic to societies” because it creates social contracts that are “trailing debts that bind people together.” The receiver becomes indebted to the giver to reciprocate at some point in the future.

According to the other AI, individuals become bound to social platforms because they obligate receivers to reciprocate in the sharing of information and life events to their social network.  The other AI notes that the relationship between individuals and these technology providers was initially ignored by Wall Street because free is a negative in a world obsessed with money. Anthropologists, in contrast, actively listen to social silence and recognize the value that such an incidental information exchange creates.

In combination, we think the two AIs can be very powerful. Artificial intelligence can provide insight into what is happening, while anthropology intelligence helps explain why it is happening. We believe that this type of two-pronged analysis can help determine how successful new technologies may ultimately become. For example, Shopify’s (SHOP) intuitive and comprehensive ecommerce technology set the stage for an emerging software leader from a strictly quantitative analysis viewpoint. Add to this the anthropologic view that entrepreneurship is growing post the financial crisis and young consumers prefer to buy from businesses they identify with, and the makings of a new blue-chip powerhouse become more evident.

At Kingsland Growth Advisors, we have always sought out the why, which helps us frame the size of any new opportunity. We believe that by focusing on both the what and the why, we create the potential to turn short-term fluctuations in the market into even better long-term returns in the next generation blue chips stocks that we seek.

All the best to you,
Arthur K. Weise, CFA

Mind is Playing Tricks on Me (Part 2)

To Our Investors and Friends,

The S&P 500 Index (S&P 500) increased 2.22% in June, driven by growth stocks for the first time in many months. Oil increased 11% in the month to end slightly over $73 a barrel, reaching a level not seen since 2018. The 10-year Treasury bond declined 13 basis points to 1.45%, as did the spread between the 2- and 10-year, ending the month at 99 basis points, a 29 basis point contraction. After hibernating since last September, large cap growth finally emerged from its slumber, up 6.3%. The Russell 2000 Growth Index increased 4.7%. On the value side, many stocks gave back some of their recent gains. The Russell 1000 Value Index contracted 1.2%, and the Russell 2000 Value Index fell 0.6%.

The economy’s dramatic change from a nearly complete shutdown to rapid reopening driven by a faster than expected vaccine rollout around the world has turned the market’s attention to inflation. Some market strategists have suggested that “reopening related” inflation could be the beginning of high inflation that was last experienced back in the 1970s (as seen in the chart below). Supporting this is a view that US oil production is now hindered by ESG (Environmental, Social, Governance) considerations and could be followed by greater regulations to stem global warming. Oil was a primary driver of inflation in the 1970s, since it is a major expense in the production of all commodities and the primary fuel for an industrial economy. In addition, the returning labor force is demanding higher wages as they re-enter the labor market. Having discovered new freedoms of the “gig” economy, many workers can demand meaningfully higher wages for traditional low skill jobs. Other market strategists have suggested that these pressures are transitory and due to friction that occurs as supply lines are reactivated and inventory restocked. Over time, such re-opening periods spark technological innovation that dramatically increase productivity and offset inflationary pressures.

We believe that Inflation will likely remain a topic of intense debate and has been the narrative supporting value’s superior performance versus. growth over much of the last year. In “Mind is Playing Tricks on Me” Part 2, we examine the popular myth that growth stocks are hurt by inflation, while value stocks benefit (last month, Part 1 attempted to debunk the idea that we are in a second tech bubble). We calculated the stock returns of both leading technology and industrial companies during the 1970s. The stock returns of our technology cohort through the decade are as follows:  Intel (INTC’s IPO was in 1971): 3,040%; Texas Instruments (TXN): 41%; and Hewlett Packard (HPQ): 130%. The stock returns of our industrial cohort were Caterpillar (CAT): 91%; Honeywell (HON): 102%; and Boeing (BA): 440%. Contrary to popular myth, there was no sector-skewed difference in returns between these two groups. As has been the case for decades, stock performance over any meaningful period is directly tied to revenue and earnings growth. For average companies, mature companies with fewer competitors often are more successful passing on price increases than developing industries with many competitors. This slight edge of the average is no match for superior stock picking.

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 have the potential to produce strong stock performance for the underlying shares over many years. With a long-term horizon in mind, we believe the current correction in growth stocks affords a good opportunity to buy some of the best companies out there at relatively attractive price levels.

All the best to you,

Arthur K. Weise, CFA

Mind is Playing Tricks on Me (Part 1)

To Our Investors and Friends,

The S&P 500 Index (S&P 500) increased 0.6% in May as value stocks continue to move higher, while many growth companies declined for the month. Oil rose an additional 4.3% in the month to end slightly over $66 a barrel, and is now up 35% for the year. The 10-year treasury bond slightly declined in the month to 1.58%, as did the spread between the 2- and 10-year, ending the month at 144 basis points, a five basis point contraction. Value dominated, especially industrial and commodity businesses that plan to increase pricing in the current inflationary environment, a phenomenon that investors have been eager to embrace, no matter how long or fleeting such pressures remain. As a result, the Russell 2000 Value Index increased 3.1%, the Russell 1000 Value Index grew 2.3%, and growth sank…1.4% for the Russell 1000 Growth Index and 2.9% for the Russell 2000 Growth Index.

The economy is dramatically different from a year ago. The second quarter of 2020 was the worst quarter of the COVID-led recession and makes for the easiest comparisons from a growth perspective for a majority of companies, especially travel, brick and mortar retail, and restaurant businesses. In the past week, many retailer’s first quarter reports (ending in April) showed eye-popping same store sales as the recovery charges full speed ahead, boosted by a substantial fiscal stimulus check for lower- and middle-income consumers. We believe the next two quarters will be meaningful in determining what the economy looks like in the future. Some of the changes over the past 12 months might be here to stay while others we will be happy to be rid of. My enthusiasm for flying immediately plummeted last week, the first time I traveled by plane since the pandemic. LaGuardia Airport’s multi-year construction project and long security lines that left us running for our plane was a quick reminder that virtual meetings are a fantastic alternative.

“Mind is Playing Tricks on Me,” an early 90s hit song by the Geto Boys, is a reminder that our minds often alter reality to reflect our desires or fears. When faced with a new situation, our minds often distort reality to help us understand what is happening. In this letter, we are going to answer a question we are often asked: “was last year a growth bubble like the internet bubble over 20 years ago?” We suspect this view is part of the reason why growth has been so violently sold off over the last three months.

We compared the performance of leading stocks from March 1999 through August 2000 (a few months after the peak) to leading stocks from December 2019 through May of 2021 (a few months after the growth peak). We also examined the revenue growth of these same stocks over a 12-month time frame (FY 1999 and FY 2020). Finally, we compared these returns to that of the S&P 500 over the same time frame. The Four Horsemen of 1999 include Oracle, Cisco, EMC, and Sun Microsystems. The 1999 Tech Darlings include Qualcomm, Network Appliance, Broadcom, and JDS Uniphase (bring back memories?). Last year, FANG consisted of Facebook, Amazon, Netflix, and Google (Alphabet), while the 2020 Tech Darlings include Tesla, Peloton, DocuSign, and Zoom Video.

Source: Company reports and William O’Neil’s Panaray database.

So, is it Tech Bubble 2.0? Based on the chart above, it is difficult to come to that conclusion. In fact, stock performance is far more consistent with revenue growth than back in 1999. Twenty years ago, the Four Horsemen returned four times the revenue growth of the S&P 500 and the stocks advanced 17 times as much as the Index. The 1999 Tech Darlings returned 16 times the revenue growth and advanced 67 times the return of the S&P 500. This time around, FANG produced 24% revenue growth versus -2% for the S&P 500 and advanced 66% versus the 30% return of the S&P 500.  The 2020 Tech Darlings produced 126% revenue growth compared to the S&P 500’s -2% return and advanced 374% versus the 30% gain of the S&P 500 over the same time frame. Did the 2020 Tech Darlings get ahead of themselves? Yes. Are they in a bubble? We don’t think so, especially if they can continue to grow into their stock prices (the 1999 Tech Darlings all saw their businesses decline over the subsequent years).

Next month, we plan to examine another popular myth… that inflation is bad for technology companies.

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 have the potential to 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

Investing Lessons from a Pro

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

The Return of the Cyclicals!

To Our Investors and Friends,

The S&P 500 Index (S&P 500) increased 5.8% during the quarter as the market awaits a robust cyclical recovery this year. Oil prices rebounded a robust 25.2% to $61 from $49 at the beginning of the year. The 10-year treasury bond increased 81 basis points (bps) in the quarter to 1.74%, while the spread between the 2- and 10-year substantially widened 71 bps to a rare 151 bps. Expectations for one of the best cyclical recoveries ever led value to decidedly trounce growth. The Russell 2000 Value Index increased 21.2% for the quarter, followed by the Russell 1000 Value Index, which gained 12.2% for the quarter. The Russell 2000 Growth Index increased a more modest 4.9%, while the Russell 1000 Growth Index, which beat large cap value by over 35% in 2020, was up 1.0% in the quarter.

Since last September, the Russell 2000 Value index is up 61%, 28% higher than the Russell 2000 Growth Index over the same time frame. What could possibly justify such a rapid recovery, and the strongest performance versus the growth index in more than 20 years? A cyclical recovery unlike anything we have ever experienced, at least that is what the market is expecting.  As can be seen in the following chart, the top end of the value index is expected to trounce the top end of the growth index this year from a revenue and earnings perspective. After one of the worst economic declines in years, the economy is set up for a meteoric recovery in 2021. In fact, the top 25 companies in the Russell 2000 Value Index are expected to experience a 63% revenue gain and an 87% increase in earnings in 2021. This compares favorably to the top 25 companies in the Russell 2000 Growth Index’s more modest 29% increase in revenues and 80% increase in earnings.

Source: Factset.  As of March 31, 2021.

Why is there such a difference between growth and value stocks? After a horrendous 2020, market leading material companies such as US Steel, Alcoa, and Cleveland Cliffs, which top the value index, are expected to experience an unusually strong recovery in 2021. In fact, analysts increased their earnings expectations of this cohort of the top 25 index holdings, including material, energy, casino, and travel companies by 55% in just the last few months. No wonder the market is selling technology favorites…their steady growth doesn’t hold a candle to the cyclical growth of traditional favorites (at least early in 2021).

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

The Psychological Impact of COVID-19

To Our Investors and Friends,

The S&P 500 Index (S&P 500) increased 2.6% during the month of February as the market anticipated an economic recovery on the horizon. Fears of a slow oil production ramp-up during this anticipated recovery drove oil prices up a steep 17.8% this month, to end at almost $62 per barrel. The 10-year treasury bond increased 33 basis points (bps) in the month to 1.44 bps, while the spread between the 2- and 10-year widened 30 bps to 130 bps. As would be expected, the anticipation of a rapid economic recovery drove value to significantly outperform growth and small cap to outperform large cap. The Russell 2000 Value Index increased 9.4% for the month, followed by the Russell 1000 Value Index, which gained 6.0% for the month. The Russell 2000 Growth Index increased a more modest 3.3%, while the Russell 1000 Growth Index, which beat large cap value by over 35% in 2020, was flat for the month.

Since the onset of COVID-19 about one year ago, humanity has dramatically changed how we live and work. This has caused people an unusual amount of stress and anxiety, often leading to erratic and sometimes horrific behavior. As explained in Nicholas Christakis’s Apollo’s Arrow, The Profound and Enduring Impact of Coronavirus, stay-at-home orders and a change in daily life has caused people around the world feelings of considerable loss, often leading to depression. “The damaging psychological impact of plague has been known for a long time…the corruption of the mind was much more dangerous during an epidemic than the …air that we breathe around us.” In an attempt to regain control of their lives, many blame others for the disease, instead of the faceless virus itself. We attribute this blame game in part for the attack on the Capitol in early January, and even the erratic trading of GameStop (GME) over the last month as the little guy pushed back against Wall Street (Gamestock anyone?).

Christakis believes that the economy will continue to be impacted by the “clinical, psychological, social and economic shock of the pandemic…perhaps through 2024,” or well after herd immunity is reached and COVID-19 is behind us. The long-lasting psychological impact of the disease will create uncertainty that makes us especially cautious about the market’s assumption that the world is going to quickly return to the pre-2020 economy. We don’t buy it, and instead expect many of the strengths and weaknesses revealed by COVID-19 will inalterably shape our future. The psychological impact of COVID-19 could far outlast the virus which is why we are especially interested in healthcare companies that focus on mental health, an area that we believe will be important to consumers and corporations alike. If we ever want to fully recover from this pandemic, we must compassionately embrace those with depression and anxiety, healing the wounds caused by COVID-19.  

Through all of this, our focus on the digital economy and how it is changing our world remains steadfast. COVID-19 has been the event that has led to mass discovery of what is new and great about the digital world, and what is not working in the brick-and-mortar economy. We think the emerging leaders in the digital space are going to be the next FAANG (Facebook, Amazon, Apple, Netflix, and Google) of the bull market that began March of 2020 – a bull market that we think will create a next generation roaring 20s. This current market correction doesn’t mark the end of COVID-19, but the beginning of something new.

All the best to you,

Arthur K. Weise, CFA