The IAS strategy made a significant posture change today. And it was a rare posture change for us. First, some background:
Markets tend to reward companies that are growing faster than expectations. Growth is always a factor that attracts a premium in stock price.
But there are market conditions that will cause successful growth companies to lose their premium on a temporary basis:
Investor Rotations to Value from Growth
Policy change that benefits specific industries
We believe the last week’s performance has been driven principally by policy. One can see that investors are already picking the winners from the tax changes approved by Congress. Investors are bidding up the players they expect to be winners. The result is higher multiple expansion for value and industries that Congress provided policy benefits.
The market is getting out in front and bidding up these perceived winners. But history tells us that this could be temporary. Successful growth stocks will eventually get a bid up again – and likely soon in our opinion. In fact, it will likely occur just as soon as the analyst community finishes digesting the tax policy changes and adjusts expectations accordingly.
Our IAS strategy is based on finding gaps between analyst expectations and digital consumer demand. Once the analyst community catches up, so will our model.
As a result, we are confident that the sectors that are typically favored in our IAS strategy will likely be laggards in the near term. So, we have rotated the portfolio to own the market (thru market ETFs) rather than the specific bullish stocks.
This adjustment is temporary. We are in the business of finding stock success stories – not market ETFs.
As policy shakes out over the next couple of weeks and stocks trade for ‘micro’ reasons instead of ‘macro’ reasons, we will return to individual stock picks.
Feel free to reach out to me with any questions about the strategy at firstname.lastname@example.org or call 443-288-6444.