Practical Applications of “Super Growth” Stocks

Abstract

Practical Applications Summary In “Super Growth” Stocks, from the Summer 2018 issue of the Journal of Investing, Wai Mun Fong of RCF Capital presents a strategy for building a portfolio of stocks of extremely profitable companies, with relatively low book-to-market (BM) ratios. Guided by the clean surplus accounting model of stock pricing, the author derives a “super growth” (SG) portfolio as the foundation of his strategy. Using quintile arrangement as a sorting mechanism, the author classifies companies by their gross profitability and stocks by their BM ratios, and then builds his portfolio using stocks of the most profitable companies (measured by the ratio of gross profits to the book value of assets) that also have low, but not extreme, BM ratios. The author then compares his SG stock portfolio with other embodiments of the growth stock paradigm such as a traditional “growth” portfolio (stocks of companies with extremely low BM ratios) and the Russell 1000 Growth Index. He finds that the SG has generally (and sometimes dramatically) outperformed these other yardsticks over the past several decades, across a variety of performance measures such as mean annual return and Sortino and Sharpe ratios. The author advises investors seeking to improve their overall and risk-adjusted returns to focus on less-extreme growth stocks of highly profitable companies. TOPICS:Security analysis and valuation, portfolio construction, performance measurement