Revenue Wreck in Stocks: The High Price of Low Growth

Introduction: R1000 Sales Growth Is Approaching Great Recession Lows
Valuations Have Not Fallen to Reflect Slowing Sales Growth
Kailash Portfolio by Growth Quintile: Best Opportunity in Fastest Growing Kailash Portfolio Stocks
Conclusions
Appendix – Energy Sector Is Not the Primary Driver of Slowing Sales Growth

Introduction: R1000 Sales Growth Is Approaching Great Recession Lows

Over the last several years we have noticed that market participants seem to be paying ever larger amounts for firms that demonstrate an ability to grow top-line irrespective of underlying fundamental firm health. The over-arching argument in favor of such behavior has been that in a world where revenue growth has become increasingly scarce, growth is therefore intrinsically more valuable. In this paper we explore the significant slowing of sales growth. We found that the R1000 3-year sales growth is at or near the Great Recession low and that there has not been a corresponding decline in most valuation metrics to reflect this slower growth. Our analysis also showed no correlation between 3-year revenue growth and average stock performance. However, we found that the Kailash models were very effective in differentiating between stocks that would outperform and stocks that would underperform among sales growth quintiles.

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To the degree you believe that the Russell 1000 represents a reasonable proxy for public corporations in America, Figure 1 below charts the rolling 3-year absolute revenue growth of the index’s constituents. It certainly conforms to the central construct of growth bulls’ thesis: revenue growth is at levels last seen in the depths of the Great Recession. Market participants often categorize themselves as bulls or bears, pessimists or optimists, or people who see the investing world as a glass half full or half empty. For full disclosure, certain members of the Kailash team have been accused of “…looking at the investing world as if it were a half-empty glass of dirty water with a crack in it and perpetually worrying that someone was trying to steal it from them.” Yet even given this characterization, the chart below seems rather shocking particularly in light of just how resilient markets have been. We believe that the growing mania in sales growth will eventually create an opportunity to buy the best stocks for a recession at very low prices.

KCR is an organization that puts primacy on capital preservation. Our post, Bear Traders, shows the historical importance of avoiding losses while our piece on popular fast growing stocks highlights the herding and risks in today’s glamour stocks. Please see our work on GARP investing to find profits at reasonable prices.

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ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

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As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
Kailash Capital Research, LLC ’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital Research, LLC – All rights reserved.

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