Monday’s trading


I think yesterday could turn out to mark an important shift for US stock trading.


First, some performance figures:

year-to date       from the March low       yesterday          2 years     3 years

NASDAQ                   +2%                    +34%                           +2.4%           +22.6%       +48.2%

Russell 2000           –20%                    +33%                           +6.1%            -18.0%          -2.5%

S&P 500                    -9%                     +20%                           +3.2%             +8.9%        +20.2%


The S&P is just there for reference–and because it’s the key US equity benchmark.  The comparison I want to draw is between tech-heavy global-reach NASDAQ and the made-and-sold-in-the-USA Russell 2000 mid-cap index.

The difference year to date, 22%, in favor of NASDAQ, is huge.  Even more dramatic, the spread over the past two years, again for NASDAQ, is a whisker over 40%.  Over three years, it’s +50%+.  For the R2000, it’s like DJT (Trump Hotels and Casino Resorts) all over again.

Unfortunately for all of us Americans I think this will remain the primary trend for at least as long as the current administration is in office.

However, fear of the economic damage created by Trump’s pandemic denial has caused investors to stretch NASDAQ/R2000 valuation differences to the breaking point.  Yes, we’re considerably off the lows.  But economically sensitive stocks (R 2000) are still being priced, relative to NASDAQ, as if we were still at the worst level of panic.

But the market seems to be coming to believe that the relative rubber band has been stretched too far.


–during the rebound from the late March lows, the Russell 2000 has kept pace with the NASDAQ for the first time in a long while–despite the much greater damage from the pandemic domestically than abroad

–post their initial large upward leap, there has been a duel for maybe a month within NASDAQ between tech like Shopify, Zoom and Beyond Meat that’s perceived to benefit from the pandemic, and more traditional tech firms.  On fear days, the former go up, both in absolute terms and relative to the market; on more optimistic days, they go down.

–the epic underperformance of the Russell 2000.

In other words, the market is back to analyzing and pricing risk again, instead of just panicking.

To my mind, yesterday suggests the market is starting to expand its horizons and sort through the rubble of economy-sensitive stocks in a more serious way.  I think this will continue.  For how long?   I don’t know.  My guess is at least a month.  But maybe much longer.


same conclusion, different thought process

Coming at this from a different direction (the one that actually started me down this track):

A competent growth stock manager should easily be 500 basis points ahead of his/her benchmark, year-to-date.  Could be a lot more.

This is gigantic.  It’s like being up 15 – 0 in the fourth inning of a baseball game.

Strategy has got to shift from trying to score more runs to protecting the lead.  Unlike baseball, this is straightforward for a portfolio manager to do.  Become more like the index.  You won’t gain more outperformance ( which you don’t need) but you won’t lose any either.  You do this by buying the domestic cyclicals that have been market laggards for so long.  An added plus, they’re still in the bargain basement.







earnings growth: velocity vs. acceleration

velocity vs. acceleration

For investors, earnings velocity is the rate of change of earnings.

Earnings acceleration is the rate of change of velocity.


If a company is growing earnings per share at a steady +10% annual rate, it has earnings velocity of +10% and acceleration of 0.

To have earnings acceleration, the rate of earnings growth has to increase.  The growth rate pattern has to be something like:  +10%, +12%, +15%…

Both velocity and acceleration can be negative as well as positive.  If velocity is negative, earnings are shrinking.  If acceleration is negative, the rate of earnings growth is slowing down.  For growth investors, both are bad signs.

as applies to growth investing

Having any earnings per share growth is better than having none.  Having eps growth that’s fast, and faster than that of the average stock, is an important characteristic of attractive growth stocks.

Having eps acceleration is also important.  Its presence typically creates the largest price earnings multiple expansion.

Acceleration is a two-edged sword, however.  Securities analysts looks for signs of earnings growth deceleration as an early warning sign that a company’s period of superior growth–and therefore of its attraction to investors–is coming to an end.  So it’s often the case that the PE will begin to contract, even though absolute growth is high, because that growth is starting to decelerate.

why this can be important:  performance implications

This can create an odd situation between the performance of two stocks, A and B.

Annual growth of A’s earnings: +20%, +35%, +45%, +25%.

Growth of B’s earnings:  +10%, +12%, +15%, +18%.

In the first two years,  Stock A most likely has outperformed Stock B.  By year 4, B is most likely outperforming A, even though the rate of growth of A’s earnings is continually better than B’s.  That’s because A’s earnings are beginning to decelerate, while B’s are not.








Apple (AAPL) as a growth stock

Apple is among the most successful growth companies of the past ten years.  However, AAPL has had a most peculiar trajectory as a growth stock.  To my mind, it has barely followed any part of the typical growth stock pattern I outlined yesterday.

How so?

For one thing, the peak price earnings multiple and the peak stock price didn’t coincide from AAPL.  Yes, the company did switch to a much less conservative method of accounting for iPhone profits early in that product’s life, but I don’t mean that.  Even after the switch, the PE didn’t expand while the company was piling up quarter after quarter of spectacular, continually surprisingly strong, earnings performance .  The multiple contracted slightly instead.

For another, it was clear by, let’s say 2012, that the smartphone market was becoming saturated.  AAPL was also facing increasing competition from the Android operating system and from Samsung as a manufacturer of mobile devices.  So we had to think that pretty soon the iPhone profit dynamo would begin to lose momentum.

What about another reinvention?  The issue here has always been:

–Reinvention #1, the iPod, doubled the size of a small company.  Reinvention #2, the iPhone, more than doubled the size of a now-large company.  To repeat the same quantum leap, Reinvention #3 would have to be twice the size of the smartphone.  What would that product be?  Would such a product be possible?  (my answer: probably not)  Is such a product likely?  (not likely at all)

(AAPL has had two subsequent innovations, the iPad and the iWatch.  Neither has created anything like the response needed to be Reinvention #3)

In a nutshell, the elevator speech was starting to give a sell sign–based both on earnings momentum for the company as currently constituted and another possible reinvention.


Yet, the stock continued to go up, and to outperform the S&P, until about a year ago.


More on Monday.