U.S. Strategies Review: Growth Investing Keeps Paying As Markets Hit New Highs

The S&P 500 hit new highs again in July. But after a multi-year bull run dating back to 2009, new highs are really nothing new for the index of large-cap US shares. These days headline writers get more animated when the main benchmark loses ground – and there’s never a shortage of headlines warning of an imminent crash.

So for onlookers, the performance of American markets has been exhilarating and terrifying in equal measure. In the eight years since the darkest days of the financial crisis, the S&P has risen by 230 percent. Other US indices have also been stretching towards new highs. Among them the mid- and small-cap S&P 400, S&P 600 and Russell 2000 benchmarks.

For the 60 guru-inspired investment strategies tracked by Stockopedia, these are interesting conditions. We’ve found over the past five years in the UK that different investing styles outperform during different periods of the market cycle. Our recent review of the screens in the UK showed that small-cap growth strategies had been the big winners so far this year. So how have the Guru Strategies been faring in the US?

Stockopedia’s long-only GuruModels span a range of investment disciplines – from deep value small-cap bargains to high yield blue-chip income. Each one of the 60 strategies is categorised as either Quality, Growth, Value, Bargain, Income or Momentum. We launched them with US shares in July 2014.

The strategies model the approaches used by some of the world’s best known investors. They’re rebalanced quarterly to ensure the shares in each portfolio match the rules of each strategy as closely as possible. Sometimes the demanding rules of these screens mean that some of them don’t always offer up adequate numbers of realistically investable stocks. Also, we don’t account for the drag of trading costs or the bonus of dividend payments.

In terms of performance, all six Guru Strategy categories delivered composite returns of more than 19 percent in the 12 months to the end of June 2017. It was a period when percentage gains across the US indices reached well into double figures. The S&P rose by 15.5 percent, but it was the tech-heavy Nasdaq Composite which saw the biggest rise, of 26.8 percent.


Guru Strategies 12 Month performance – 30 June 2016 – 30 June 2017

Nasdaq, of course, is home to some of the world’s biggest tech names. And there have been stunning gains in some of its stocks in recent years. Five years ago, for instance, you could buy Netflix (NASDAQ:NFLX) stock for less than $8.00, but now you’re looking at $188.00. Likewise, Facebook floated in 2012 at $38 per share and got pilloried for its $104-billion price tag. These days it trades at nearer $166 per share, which values it at about $370 billion.

Against this bullish backdrop, it’s not surprising that the best overall investing style over the past year has been Growth, with a composite gain of 35.9 percent. A quick glance at the composite returns (in the table below) suggests that none of the strategy styles has really underperformed. Yet under the surface, there was wide variation in the performances of different strategies.

Index / Strategy Composite

6 Month Performance

12 Month Performance

S&P 500

+8.2 percent

+15.5 percent

S&P 400 Mid Cap

+5.2 percent

+16.7 percent

S&P 600 Small Cap

+2.1 percent

+20.8 percent

Nasdaq Composite

+14.0 percent

+26.8 percent

Dow Jones Industrial Average

+8.0 percent

+19.0 percent

Russell 2000 (Small Cap)

+4.3 percent

+22.9 percent

Guru Strategy Composite

-0.5 percent

+24.8 percent

Growth Composite

-0.4 percent

+35.9 percent

Bargain Composite

-1.6 percent

+31.7 percent

Value Composite

+0.8 percent

+25.5 percent

Quality Composite

+1.0 percent

+24.0 percent

Momentum Composite

-0.9 percent

+21.3 percent

Income Composite

-2.8 percent

+19.6 percent

6 Month Performance – 1 January 2017 – 30 June 2017
12 Month performance – 30 June 2016 – 30 June 2017

In particular, while the main US indices continued to rise in the first half of 2017, almost all the strategy groups took a breather. Much of this seems to be because American markets actually got off to a slow start in 2017, with valuations sliding somewhat. That seems to have taken the edge of the guru strategies across the board over the first six months.


Guru Strategies 6 Month Performance – 1 January 2017 – 30 June 2017

What worked in US investing?

Among the Growth strategies, the best performer over both the six- and 12-month periods was the Peter Lynch screen, which rose by more than 20 percent and 85 percent respectively. One interesting point – shown in the chart below – is that this strategy had a very quiet patch between the summers of 2014 and 2015, and it wasn’t until 2016 that it really took off.

Like the UK version, the US Peter Lynch screen has struggled to find high numbers of investable stocks – typically only around 10 at any time. And like many of the guru strategies it had quite a poor Q1 and then recovered in Q2. But overall it’s been very impressive, with highlights including Northeast Bancorp (NASDAQ:NBN) and Hooker Furniture (NASDAQ:HOFT).

Stockopedia’s modelling of Peter Lynch Growth

Over six months (the first half of 2017), the Peter Lynch strategy was followed in performance by the William O’Neil CAN-SLIM-esque screen, which was up around 10 percent. This classic high flyer approach blends fast paced earnings growth with strong share price momentum, and Stockopedia’s modelling of it is finding plenty of American stocks to go at.

Over 12 months, the growth strategies inspired by two British investors – Jim Slater and Robbie Burns – followed the Lynch screen. Both notched up returns of over 40 percent. These are high achieving growth-at-a-reasonable-price strategies that have worked well in the UK and seem to be doing the same in the US. 2017 has been quiet for them, but the 2016 US portfolios held winners like Employers Holdings (NYSE:EIG), Kingstone Companies (NASDAQ:KINS), Marine Products (NYSE:MPX) and Rudolph Technologies (NASDAQ:RTEC).

Value strategies are partly paying off

Some Value strategies have had a strong 12 months in the US – which is exactly what we’ve seen in the UK. Part of this is possibly down to a change in sentiment among investors. In recent years, dependable, high yielding, defensive blue chips were popular and they became expensive as a result. This has perhaps encouraged investors to switch towards riskier, value alternatives which could hold the potential for greater gains.

Typically, the stocks making it onto Value screens become much more interesting in periods when sentiment is changing, or in bear markets. That they’ve done well over the past year in a US market that some see as expensive, suggests that attitudes to risk and the hunt for returns could be changing.

In pure performance terms, no other Value strategy could touch the David Dreman High Dividend screen over six and 12 months, with returns of around 70 percent and 50 percent, respectively. But over that time the strategy has struggled for diversification, with just a few stocks passing the rules. Some of the winning holdings have been National Presto Industries (NYSE:NPK) and Star Gas Partners (NYSE:SGU).

Much better Value-inspired diversification could be found on the John Templeton Bargain screen, which returned 30% over 12 months. That figure masks the fact that like many Value strategies, the Templeton screen has plateaued through 2017. Some of the highlights of holdings through the second half of 2016 were Kingstone Companies, RCI Hospitality (NASDAQ:RICK) and Plumas Bancorp (NASDAQ:PLBC).

Best of the rest

Among the Quality investing strategies, there were only three that managed positive returns in both the second half of 2016 and the first half of 2017. They were the R&D Breakthroughs screen, Ronald Muhlenkamp ROE screen and the Joseph Piotroski High F-Score screen.

The Muhlenkamp screen led the pace with a 35 percent return over 12 months and 15 percent over six months. While the strategy did struggle for available stocks, it did very well from holdings like Enzon Pharma (OTCQX:ENZN) and Fonar (NASDAQ:FONR).

There was a notable ‘quality’ theme in some of the better performing Income strategies through the 12 months to the end of June. Best Dividends, Geraldine Weiss Lite, and Quality Income led the list, with capital gains (pre dividends) ranging between 18 and 25 percent.

Finally, Momentum strategies offered a mixed picture over 12 months. The best performers all managed around 30 percent, and they included the Richard Driehaus screen, the Earnings Surprise screen and Bold Earnings Revisions. During the year, the Driehaus-inspired strategy saw strong gains from stocks like Marine Products, Advanced Energy Industries (NASDAQ:AEIS) and State National Companies (NASDAQ:SNC).

Outlook for US shares

The title of a recent article by the US investment writer Jason Zweig, neatly sums up the mixed feelings around US stocks as we go into the second half of 2017. “Investors, stop worrying about why ‘nobody’ is worrying” captures the sense that while markets are breaking new highs, the exuberance that often comes with frothy conditions is absent. Opinions are divided. Some commentators fret that US shares are wildly expensive, while others insist there’s no reason for a crash to be on the cards.

For Stockopedia’s Guru Strategies, the lack of any major catalyst for change means it’s likely that at least some of the Growth strategies will continue to perform well over the next six months. But those with valuation ‘rules’ may struggle to find high numbers of candidates. Meanwhile, the Value strategies that hit a wall in the first half of the year are likely to keep misfiring, with occasional periods of success. As always, all eyes are on the health of US economics and politics. Right now, there seems to be nothing cooling this bull run for equities.

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