The DIAS Focused Growth Portfolio – Under the Hood

Posted in: Economics, General, Stock Market, Thought of the Week

From 2009 to 2012, U.S. equity markets in a “risk-on/risk-off” mode, which made stock picking difficult for active managers because stocks were trading too closely together. Stocks were being bought and sold as a group for reasons unrelated to the fundamentals of the companies. There are several reasons for this extended risk-on/risk-off, many of which can be traced back to aftershocks from the financial crisis, but what we have begun to witness over the past 12 months is that fundamentals are starting to drive equity returns again, and that’s a very good thing for investors.

The DIAS Focused Growth (FG) portfolio is a portfolio designed for capital appreciation by selecting investments that our Investment Committee feels will grow substantially over the long run. The difference between the FG portfolio and other portfolios is that this is a pure equity portfolio. The portfolio typically holds between 40 to 50 stocks and will occasionally hold an exchange traded fund (ETF). Our Investment Committee will look for stocks that have an extended runway for future growth where the stock price could double over the long-run. Some of the stocks being held in the FG portfolio right now are Lululemon (LULU), Workday (WDAY), and Google (GOOG).

Stock prices often rise for reasons that are not fundamentally sounds, and the risk of owning such stocks is quite high. Therefore, our Investment Committee follows three strict guidelines when analyzing growth stocks for the FG portfolio:

  1. Focus on sales and earnings. Euphoria often drives stocks to meteoric highs, and when these stock prices are not supported by either sales or earnings, our Investment Committee chooses to pass.
  2. Look for sustainable growth. Companies that grow fast must have a defensible strategy to protect its growth or else their high valuations can compress quickly. A sharp focus on the competitive positioning of a company and proper financial management is critical to sustain high growth.
  3. A path to profitability. How a growth company spends capital is important to monitor because they may spend in ways that are less than optimal, which can hinder future growth or require additional capital.

Our Investment Committee will look for companies whose stocks can double but also are valued based on sales and/or earnings, because in the long-run, valuation is dependent upon one or both of these metrics. They believe we are at the beginning of a secular bull market that could persist for several years, delivering steady equity returns along the way. However, given that stocks are trading less as a group and more on individual merits, capturing gains from a bull market will require a change in strategy.

Read this week’s Thought of the Week if you want to learn more about the Focused Growth portfolio and how it can benefit you.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.