Comparing performance of Value vs. Growth strategies for picking stocks. End of 5-month experiment.
- WinInStocks
- Jul 22, 2020
- 5 min read
Updated: Jul 28, 2020
At the beginning of February of 2020, just before COVID stock market meltdown, I wrote 2 articles on Most Undervalued Stocks (Feb 17th) and Stocks with Fastest Growing Revenue (Feb 9th).
It is now time to check with strategy delivered the best results. Obviously, we must take into consideration a lot has happened between February and now (you know that). The stock market went down and up during that time.
Therefore, we are going to benchmark our stock picking strategies vs. the S&P 500 and Nasdaq. SP500 has not fully recovered, while Nasdaq gained 13%.
Just to quickly remind, the difference between the 2 strategies for picking stocks was:
For Undervalued Stocks, I was looking at 15 stocks with the lowest PEG (Price-to-Earnings Growth) scores. Often PEG scores were much lower than 1. Analysis here: https://www.wininstocks.com/post/top-15-most-undervalued-stocks-of-2020-based-on-peg-score-analysis
Under Growth Strategy, I was looking at 12 stocks with the fastest-growing sales over the past 5 years and over the past 1 year. The stock should have shown good levels of growth for both. For many stocks in this group, sales grew 1000% or more over the past 5 years. Analysis here: https://www.wininstocks.com/post/top-12-stocks-of-fastest-growing-companies-in-2020
Let’s see the results for the 2 investing strategies
Strategy 1: Undervalued Stocks
As you can see all stocks, but one decreased in price. The average decrease is -29%. Now, I do have to admit that we have quite a few energy and airline companies here. These companies were hit the hardest by COVID.
Strategy 2: Growth Stocks
As you can see below, we have quite a few ups mixed with downs here. The average gain is 17%. However, I must admit when doing the analysis, I would never go near cannabis stocks as I mentioned I don’t believe they can go to profitability. Also, I was quite dismissive of LYFT stock as I don’t believe the value is good and it will ever reach profitability. Removing cannabis stocks and LYFT from the set gives us an average return of 33%. Now, most of the stocks below come from NAS stock exchange, so we would need to benchmark our growth vs. NASDAQ 13% gain over the same period. So, the strategy beat the market by 20%.
So, the strategy beat the market by 20%.
It might be unfair to dismiss the Value Strategy now due to COVID and the focus of that watch list is primarily around airlines and oil. I will make sure to take another look at the performance of these stocks in the next 6 months.
However, the Growth Strategy has some potential. In the future I will do 2 things:
Take another look at the watch list for Growth Strategy.
Create another list of 10 to 12 stocks with the same profile of fast-growing sales.
Why I think this strategy is working:
For many of the above companies with growing sales, they move closer to profitability. For some of the stocks, the profitability point is predicted in a year or 2. Once this is noticed by investors, they start to accumulate shares.
Examples of such stock are EXPI stock and TWLO stock, both are on fire.
Watch out for EXAS stock which expected to reach profitability at the end of 2022. Another stock that has some potential is BOMN stock; however, the range of estimates is quite wide from getting to profit in 2021 to never becoming profitable. For this stock, a close watch is needed in the next few quarters.
Today, let’s check if the stocks in Growth Portfolio still grow their revenues and check their valuation.
Karyopharm Therapeutics (KPTI) YOY sales change is obviously overstated as it started Q1 2019 with just $155,000 in sales. But even if we compare sales for Q1 2020 vs. Q2 2019 they almost doubled.
The Price-to-sales ratio is a bit too high at 23.5. The company is not expected to get to profitability in the next few years. I would rank this company as Hold.
Cronos Group Inc. (CRON) is one of those cannabis companies which were hyped a couple of years ago. Then investors realized the competition in the category is too much. At the prices the cannabis companies have to sell their products don't cover COGS. Most quarters these companies fail to get to positive gross income not talking about profit. Despite CRON was able to grow sales YOY by 184% it is still expected to have negative EPS in the next few years. In addition, its P/S ratio is too high. This stock is a PASS for me.
Regenxbio Inc. (RGNX) grew sales a whopping 1895% YOY. It also gained a lot in Gross Income but struggles to convert that growth into stronger profit. There is no prediction for when the company will get to profitability. However, it is a WATCH for me to see if it finally stops the increase in Expenses and starts to put some of those into profit.
Aurora Cannabis Inc. (ACB) is another cannabis stock. Also, with quite little growth in sales this year. Not going to spend too much time here, it is a PASS for me.
Amicus Therapeutics Inc. (FOLD) was able to grow YOY sales by 78%. Its Price-to-Sales ratio is 18.41, which is a bit high. There is no sign of a profitable year yet. Net loss is currently higher than the company's sales, so the road to profit is long. However, it is worth to keep WATCHing.
Zillow Group (ZG) added 149% in sales vs. the previous year. It has a very good P/S ratio of 4.07. However, analysts expect that the company will maybe reach profitability by the end of 2024. At the current P/S ratio, the potential to get profitable, and solid revenue growth the stock is a BUY.
Boston Omaha Corp. (BOMN) is a bit slow to grow sales (+25% this year). Also, its P/S ratio is a bit high at 10.04. However, the company is expected to reach minimal profit next year at which it will have a PE of 405. This stock is definitely a WATCH and potentially ACCUMULATE.
Exact Sciences Corp. (EXAS) grew sales 115% vs. the same period last year. However, with the growing sales, it also managed to increase its losses. Predictions range from continuing to stay in the negative for the next few years to get to profitable territory in 2022. Definitely a watch for the next few quarters to see if the company manages to reduce expenses.
eXp World Holdings Inc. (EXPI) is the star of our watch list. While I was preparing the article the stock gained $2 more. The gain from the time of the first analysis now stands at 72%. But there seems to be no stopping here. The Current P/S stands at 1.12. The company is expected to keep growing its EPS to 0.5 in 2 years. At that level, the PE score is 40 which is good for its growth levels. The stock is likely going to continue to appreciate. This is a BUY for me.
Another company that is expected to get to profitability is Twilio Inc. (TWLO). However, at the expected EPS of $0.17, its forward PE is 1569 which is extremely high. I would be very cautious around such a level of PE. For me, this is rather HOLD.
SolarEdge Technologies Inc. (SEDG) is the only company in our watch list that is currently profitable and is expected to keep growing revenues and EPS in the next few years. Its P/S ratio is within expectations, but forward P/E is a bit high if it grows EPS at 20% (as predicted). Some analysts are predicting 30% growth; at those levels, P/E gets more attractive. This stock is a long-term BUY and hold for me.
As I mentioned in my previous analysis I have serious doubts about LYFT getting to profitability. The problem is competition in the face of UBER and how far LYFT from profitability.
Hope you liked this analysis. Sign up for future articles.
Kommentare