Tracking the growth rates of companies’ revenues and earnings helps clients identify investment opportunities.
When looking for increasing growth, focus on companies poised for expansion, says David Hollond, chief investment officer of U.S. growth equity mid- to small-cap at American Century Investments. He manages the Renaissance U.S. Equity Growth Fund.
He adds, “Companies [currently] at an inflection point—where they’ve just started to see improvement—tend to beat expectations” each quarter.
Hollond says these companies have sustainable catalysts that drive growth, which can include revamped product lineups that cash in on long-term trends, as well as improved manufacturing efficiencies.
For instance, he’s interested in Alliance Data Systems, a business that buys private-label credit cards from large chains looking to offload them. He says people started paying off debt after the downturn, and also resumed using credit cards.
In fact, people charged 31% more to credit cards in Q4 2012 than they did at the same time in 2011, marking a dramatic spending surge driven by economic improvement. If the trend continues, ADS could offer solid returns.
“This process of acceleration leads us to where the fundamental improvement is [occurring] in the economy,” says Hollond.
He adds that expansion never takes place in all parts of the economy concurrently, so investors have to look for the pockets of opportunity created by growing companies, sectors or industries.
Hollond says tracking growth focuses on the positive no matter how well the economy is performing, and for that reason, he’s willing to look at all companies.
“When it’s a cyclical recovery, [you’re] going to find acceleration in the cyclical stocks. When there’s a major downturn…the defensive companies tied to [things like] consumer staples will be more interesting.”
He concedes the latter don’t usually grow much, but adds they would expand at much faster rates than during recovery cycles.