The Math and Science Behind the Decline in Growth Stocks

To Our Investors and Friends,

The trend that began the year, energy stocks up and technology down, continued for May. At this point, many energy companies have posted gains between 70% to 90% year-to-date while technology companies have contracted 30% to 50% since the start of the year. Oil is the primary driver of these trends, advancing an additional 10% in May to close at $115 a barrel. Fearing recession, the 10-year Treasury bond is now moderating and fell four basis points in the month ending at 2.85%. Short-term rates fell even more, leading to a widening between the two and 10-year to 32 basis points from 19 basis points a month ago. Commodity-heavy value indexes rebounded, while technology-heavy growth indexes declined. The Bloomberg 1000 Value Index expanded 3.2%, the Bloomberg 2000 Value Index rebounded 2.2%, while the Bloomberg 1000 Growth Index declined 2.5% and the Bloomberg 2000 Growth Index dropped 2.2%.

After a brutal sell-off in growth stocks this year, we decided to examine both the math (return calculations) and the science (human reaction to stocks) of two prominent companies that we believe are representative of what is going on in the market. In the following example, we used Alphabet (GOOGL) as our growth proxy and Pepsi (PEP) as our safety proxy.  As seen in the chart, GOOGL has grown its revenue at an average rate of 23% over the last decade while growing its earnings at a 23% rate over the same time frame.  This is far more robust than safety holding Pepsi, that on average, grew revenue by 2% and earnings by 5% over the same time frame. Until this year, the market has paid up for this growth, as the average premium investors have been willing to pay for GOOGL’s higher growth has been about 30% (PE of 30 vs Pepsi’s PE of 23). Investors have been rewarded for the risk they were taking… from December 31, 2012, until December 31, 2021, GOOGL has appreciated 719% vs PEP’s more modest 154% appreciation over the same timeframe.

Source: Kingsland Investments, as of May 31, 2022. For illustrative purposes only.

This long history of paying up for growth has undergone a material change this year. GOOGL’s 21.5% year-to-date decline has reduced its multiple to 22 times current earnings and can be compared to PEP’s 3.4% year-to-date decline that has reduced its multiple to 27 times current earnings.

Why is the market now willing to pay a 23% premium for subpar growth out of PEP? We think the answer has to do with human behavior and place significant blame on the feeling of dread investors experience when constantly checking their portfolios. In fact, 50,000 years of evolution was not enough time to turn the human mind from prey to predator, and it is obvious in how we respond to perceived threats (such as shrinking retirement accounts). Investors en masse have sold technology stocks this year without regard for the growth, profitability or cash return profile of what was being sold, and paid steep premiums for safety. We think this shift from growth into safety is overdone and expect a significant recovery in growth stocks once the fear of inflation, the Federal Reserve rate increases and the recession dissipate. We promise… investors are not at risk of being eaten by predators but are certainly at risk of having their pockets picked by savvy, patient investors.

Kingsland Investments focuses on powerful long-term trends and the businesses and management that drive them to help discover new market leaders. Although these companies may be briefly out of favor at times, we believe strong, sustainable growth could lead investors back to them. After the last few months, growth is trading at an unusually attractive level. We think now is a good time to consider investing in these emerging technology leaders.

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 June 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. 

April Downpour

To Our Investors and Friends,

After a solid recovery through March, the S&P 500 Index completely rolled over in April, ending the month down 8.8% as fears of Federal Reserve tightening, continued inflation and recession proved too much for investors. The war between Russia and Ukraine moved into a new phase, helping propel oil another 4.4% higher in the month, to end at just under $105 per barrel. The 10-year Treasury bond shot up another 57 basis points to end at 2.89% for the month over concerns of sustainable inflation, a level not seen since 2018. Short-term rates increased at a less rapid pace, leading to a slight widening between the 2-and 10-year to 19 basis points from four basis points a month ago. All major market indexes fell in the month, value falling at mid-single-digit rates and growth declining at a double-digit rate. The Bloomberg 1000 Value Index declined 5.1%, the Bloomberg 2000 Value Index dropped 7.1%, while growth fell at a similar rate regardless of market cap as the Bloomberg 1000 Growth Index declined 11.3% and the Bloomberg 2000 Growth Index dropped 12.1%.

The market trends that have been in place over the last six months remain steadfast: inflation fears continue to push up commodity-related stocks, while growth stocks are experiencing significant multiple compression on the view that higher interest rates necessitate much higher future discount rates. April was especially brutal as a handful of notable growth businesses dropped precipitously on incrementally negative earnings news. Many growth companies are now trading below levels they saw well before COVID-19, suggesting that the market is seeking to get out of these stocks at any level.

We believe that the market action in recent months is supporting evidence for a trend that has been in place for years now….one where short-term fundamentals overwhelm everything else, causing rapid appreciation or depreciation for “what is working now.” In short, near-term price momentum is driving most stock moves in any six months. We have studied price momentum and believe that it is only dependable as an investment strategy when supported by strong fundamentals. Robert Novy-Marx’s white paper, Fundamentally, Momentum is Fundamental Momentum, proves that “price momentum is merely a weak expression of earnings momentum.” Our focus on companies with the ability to grow significantly over 10 years is with this in mind -- over time, the stocks should move in the direction of these fundamentals.

Recent short-term stock moves appear to consider only the most recent data points with little regard to sustainability. We believe that many of these current stock moves will likely reverse in the coming quarters.

Kingsland Investments’ focus on powerful long-term trends and the businesses and management that drive them is designed to accelerate the discovery of new market leaders. Although these companies may be briefly out of favor at times, strong, sustainable growth should lead investors back to them in time. After the last few months, growth is trading at an unusually attractive level. We think now is a good time to consider investing in these emerging technology leaders.

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 May 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.

Trading Computers for Shovels

To Our Investors and Friends,

The S&P 500 Index appears to have made a bottom in March, ending, at least temporarily, the decline that began in January. The Index finished the month up 3.6%, ending the quarter down a more modest 5.0%. Oil exploded higher as soon as Russia invaded Ukraine, as it became clear that Russia’s approximate 10% of daily global production would not quickly be replaced. Oil finished the month at $100 a barrel, a 4.8% gain. The 10-year Treasury bond responded with a quick 49 basis point increase to end at 2.32% on fears of sustainable inflation. Short-term rates moved even faster, reducing the 2- versus 10-year spread to four basis points from 39 basis points a month ago. The major market indexes experienced an initial sharp decline but rebounded to end the month higher. The Bloomberg 1000 Growth Index moved up 3.6% and the Bloomberg 1000 Value Index increased 2.3%. Small cap indexes bounced slightly less as the Bloomberg 2000 Growth Index advanced 1.4% and the Bloomberg 2000 Value Index increased 1.2%.

We are surprised by the severity of the one-way market that dramatically sold off technology stocks in favor of commodity-driven businesses over the last five months. The market is actively trading data-driven businesses for oil-driven businesses, reversing a trend that has dominated popular indexes since the beginning of the Information Age in the 1980s. We believe this is temporary (likely no longer than a few quarters) and driven by a few factors, the most obvious being increases in commodity demand driven by the restarting of a global economy suppressed by COVID-19 and the invasion of Ukraine. Surprisingly, the most significant of the factors is the proliferation of algorithmic trading among hedge funds that analyze vast amounts of data to find short-term trends to invest in. This has exacerbated the decline of technology stocks and the increase in commodity-based stocks over the last five months.

Despite this dramatic market repositioning, we remain steadfast in our view that data-driven businesses should again dominate index performance within a reasonable time frame. This is based on the view that data is becoming far more important than oil in running the digital economy. As seen in the chart below, the amount of global data generated is accelerating, and is being increasingly used by companies to make better business decisions. According to Frank Slootman’s The Rise of the Data Cloud, companies across the globe are currently collecting, processing and managing their businesses based on data at an accelerating rate, striving to improve efficiency and profitability with better data-driven decisions.

Source: Melvin Vopson’s article The World’s Data Explained.
A zettabyte is a measure of storage capacity expressed as 1 trillion gigabytes.

In his book, Slootman states “an organization that masters its data positions itself to claim a sustainable competitive position within its industry. Your chances for success improve if you are data-driven.” He further explains that “The data economy is powered by data network effects. The more data that is shared…the more value is created.” We believe data sharing will move from the periphery to the center of business decision-making as companies providing data cloud services help businesses generate data network effects. Data integration ultimately allows companies to conduct business with each other in seamless ways. We believe the market significantly underestimates the power of these data network effects in accelerating business decisions, which ultimately should result in faster economic growth that generates greater profits for all participants.

Kingsland Investments’ focus on powerful long-term trends and the businesses and management that drive them is designed to accelerate the discovery of new market leaders. Although these companies may be briefly out of favor at times, strong, sustainable growth should lead investors back to them in time. After the last few months, growth is trading at an unusually attractive level. We believe now is a time to consider investing in these emerging technology leaders.

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 April 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. 

Beware of Conflict Entrepreneurs!

To Our Investors and Friends,

The S&P 500 Index declined in February, dropping another 3.1% during the month. Oil moved higher by 8.6% to $96 a barrel as Russia’s invasion of Ukraine led to fear of a global oil shortage. The 10-year Treasury bond increased four basis points in February to 1.83%, while short-term rates jumped much higher, narrowing the 2-year to 10-year bond spread to 39 basis points (from 61 basis points a month ago). Most of the popular indexes have been drifting lower over the last four months, and growth is firmly in correction territory. Small capitalization stocks, which began their correction a few weeks before the rest of the market corrected, appear to be finding some strength as the Bloomberg 2000 Value Index appreciated 2.5% in the month and the Bloomberg 2000 Growth Index gained a minuscule 0.4% for the month. This was better than popular large cap indexes which are now getting hit by the ongoing correction. The Bloomberg 1000 Value Index fell 0.8% and the Bloomberg 1000 Growth Index dropped 4.1% in the month.

Over the last several months, the markets have been tumultuous and trending lower as investors sell stocks on such concerns as inflation, anticipated interest rate hikes, and most recently, the prospects of a European war that extends beyond Ukraine. At the center of much of the chaos are the conflict entrepreneurs, those market commentators and participants that attempt to breed fear into markets to bring attention to themselves or scare others into selling their holdings at depressed levels. Amanda Ripley introduces the concept of the conflict entrepreneur in her book High Conflict, Why We Get Trapped and How We Get Out to describe the many politicians that try to gain influence through instilling fear. Wall Street has more than its fair share of conflict entrepreneurs within its ranks, and they excel during times like what we have experienced over the last few months.

The conflict entrepreneur takes advantage of others by convincing them of fictions that get people riled up, leading to much more aggressive behavior than they would otherwise conduct. In her book, Ripley explains that conflict entrepreneurs use “grandiose language…to manipulate our emotions…it clarifies everything, washing away important details, energizing us to…ignore the costs.” How does this happen? Ripley discusses that during high conflict, “the brain behaves differently. We feel increasingly certain of our own superiority and more and more mystified by the other side.” “We lose access to that part of our brain that generates wonder…high conflict degrades full life for fleeting satisfaction.” It is the perfect method to get investors to ignore the benefits of long-term investing for the fleeting satisfaction of a quick sale that they regret not long afterward.

Kingsland Investments takes a long-term approach to avoid the traps created by conflict entrepreneurs. We carefully examine every company for business opportunity, leadership, profitability and competitive moat. We are especially aggressive in our search during times of market dislocation because we believe that the market will heavily discount these prospects, often for terrible reasons such as those developed by the conflict entrepreneurs. After the last few months, growth is trading at an unusually attractive level and we think the time to invest is now!

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 March 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. 

A Heavily Discounted Future

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. 

S&P 500 Returns Continue to be Driven by Younger Companies

To Our Investors and Friends,

The S&P 500 Index (S&P 500) finished the year with a robust annual increase of 26.9%, driven by a persistent rebound in the brick-and-mortar economy. Despite signs of a COVID-19-related economic slowdown in the final months of 2021, oil finished the year at $75 per barrel, a 55% increase for 2021. The 10-year Treasury bond advanced 59 basis points for the year, finishing at 1.52%, while the spread between the 2- and 10-year narrowed by three basis points since the start of the year. Small cap value outperformed growth by the most meaningful amount in 20 years, significantly making up for 2020’s value underperformance. In fact, value beat growth across indexes as old-line financials, energy companies and retailers made a stunning comeback. The Bloomberg 2000 Value Index increased 29.4% and the Bloomberg 1000 Value Index expanded 25.4% for the full year. High growth businesses -- including software as a service and the biotechnology complex -- declined, narrowing the participation of growth’s gains to a few select mega cap companies and the semiconductor industry. The Bloomberg 1000 Growth Index expanded by 25.2% and the Bloomberg 2000 Growth Index increased a more modest 9.6% for the year.

2021’s stock performance was driven by a very different group of companies than the previous year, but one thing remained constant…. younger companies continued to perform better than older companies. This is especially notable given the significant outperformance of younger companies in 2020, as can be seen in the chart below.

We believe the continuation of this trend, which really began to materialize after the financial crisis more than a decade ago, is driven by a few notable factors. Young companies are more often founder-led, which generally contributes to strong growth cultures. These companies favor investment spending on new technology, products and salespeople that can reduce near-term returns, but lead to much higher long-term returns. Older companies are led by multi-generational managers that often are appointed to their roles because they are the “safe” choice. They favor stock buybacks and other means of returning profit to shareholders, limiting the long-term potential of these companies.

This puts passive index owners at a considerable disadvantage. In fact, despite significant gains in the stocks less than 50 years old (Apple and Microsoft are celebrating their 46th and 47th birthdays, respectively, in 2022), these groups represent just 49% of the S&P 500.  Despite significant underperformance over the last decade, the 101 and older crowd is still 29% of the index. We expect the S&P 500 will continue to add new robust businesses that are shaping our economy, but its gradual approach likely keeps the best returns derived from the digital transformation of our economy out of the hands of passive investors.

We’ve always focused on discovering and owning transformative companies that are changing the global economy. We believe the new intelligent tools of the fourth industrial revolution are helping to accelerate this transformation. Although these companies won’t be embraced by the market every year (2021 is one such year), we are excited about what these companies are doing and think long-term investors may be rewarded.

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

The views expressed are those of Kingsland Investments as of January 3, 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. 

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