Portfolio Construction | Stock and Sector Selection Philosophy
While valuation is considered in risk management, we do not adhere to the conventional definition of Growth and Value in selecting eligible securities. It does not impact our selection process if a stock migrates from the value to the growth component of the index. An opportunity is either secular or cyclical in nature, but we seek signs of an upward price trend in either case:
1) Secular growth stories have more potential for long-term earnings growth.
a. Innovators and market disruptors can provide eye-popping return compounding potential if they become a market leader in an area with rapidly expanding addressable market. Emerging growth companies are tricky as they are subject to higher risk of market prices getting ahead of themselves in the innovation cycle. Valuation increases imply future growth in EPS, there is often greater risk in the first price ascent of a market darling. Risk-reward improves after a first hype wave has notably corrected.
b. Stable growers also enter the portfolio assuming they have reasonable barriers to entry, balance sheet strength, and transparency in returning shareholder capital vs. reinvesting in future growth.
2) Cyclical opportunities are those where we perceive secular tailwinds for future earnings growth over the intermediate- to long-term. These require timing over several-year cycles. At peak cycle earnings, cyclical businesses look cheap based on PE ratios. Stock price leads eventual decline from peak earnings, and a PE start to look more expensive before earnings eventually trend down. Entry and exit points matter. We are not deep-value oriented, we want some visibility to future earnings catalysts at a minimum. Perhaps a sign that a stock is rising from a multi-year base. Be earlier than the crowds, but don’t sit on dead money for years because something looks cheap. Buying and selling along the holding period is critical for risk management - these positions need to be trimmed on the way up.
Disclosures
All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Advisory services are offered through GenSphere Private Wealth, LLC, a Registered Investment Advisor in the State of Washington. Being registered as a registered investment adviser does not imply a certain level of skill or training. All investing involves risk including loss of principal. Past performance does not guarantee future results.