Buffett Taro Ryu: The Secret to Investing in Small-Cap Growth Stocks

1. The reason why the era of small-cap growth stocks is coming

　・End of GAFAM boom and end of interest rate hikes

2 What is important when investing in small-cap growth stocks

　・Interest Rates, Quarterly Results, Sales Growth Rates, Charts

3 points to keep in mind when investing in small-cap growth stocks

　・Portfolio・Number of stocks

　・Trading timing and holding period

How to analyze small-cap growth stocks with 4moomoo

List of 5 US small-cap growth stocks (20 carefully selected stocks)

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My name is Buffett Taro.

Global stock prices have long-term upward fluctuations on a 10-year basis.

The 50s: German stock boom

60s: US stock boom

70s: gold boom

80s: Japanese stock boom

90s: dot com boom

00s: BRICs boom

The 10s: GAFAM boom

Also, considering that both booms reached a long-term stagnation phase in the next era, it is natural to think that GAFAM, which became a boom in the 10s, will enter a long-term stagnation phase in the future.

In fact, in Apple's financial results for the July-September fiscal year, the sales growth rate was -1% compared to the same period last year, and negative growth was recorded for 4 consecutive quarters, and there is no momentum in the past.

Also, considering that only 5 GAFAM stocks account for about 1/4 of the total market value of the S&P 500, if GAFAM enters a long-term stagnation phase, there is a possibility that the upper price of the S&P 500 will become heavy. In other words, there is a high possibility that passive management, which invests in S&P 500 index funds, will also enter the winter period.

But that doesn't mean all US stocks are bad.

For example, among US stocks, there are many growth stocks with a sales growth rate of +30% or more compared to the same period last year, so by investing in such growth stocks, we can aim to maximize assets.

Above all, considering that Chairman Powell of the Federal Reserve suggested stopping interest rate hikes at the FOMC in November, there is a high possibility that multiple expansion (increase in PER) will occur in the future, and small growth stocks with many high PER stocks will become more popular.

However, when investing in small-cap growth stocks, investment skills are required. Therefore, I will introduce “Buffett Taro Ryu American Small Growth Stock Investment.”

The most important thing in small-cap growth stock investments is “interest rates.”

Therefore, since Chairman Powell suggested the cessation of interest rate hikes at the FOMC in November, it can be thought that the era of small-cap growth stocks has arrived.

Why are interest rates important? In other words, this is because interest rates have a big impact on a company's price (market capitalization).

In the first place, a company's price can be derived by a simple formula called C ÷ (r-g).

C: Cash (current cash flow)

r: discount rate (interest rate)

g: growth rate

For example, if C is 100, r is 5, and g is 2, the company's price is 33.

Next, if C is 100, r is 4, and g is 2, the company price is 50.

This means that when the discount rate (interest rate) becomes smaller, the company's price increases.

Also, if C is 100, r is 2, and g is 1, the company price is 100.

In other words, if the discount rate (interest rate) drops drastically, the price of the company will rise even if the growth rate falls.

Incidentally, if C is 100, r is 7, and g is 3, the company price is 25.

This means that if the discount rate (interest rate) rises extremely, the price of the company will drop even if the growth rate increases. In fact, as the Fed raised interest rates at a rapid pace in '22, small-cap growth stocks crashed drastically across the board.

However, the fact that Chairman Powell suggested stopping interest rate hikes at the November FOMC means there is a high possibility that the next action will not be “monetary tightening,” but “monetary easing.”

In other words, since there is a high possibility that the discount rate (interest rate) will drop after 24, it can be said that company prices will also rise more easily. Above all, small growth stocks with more high PER stocks benefit from lower interest rates, so it is expected that stock prices will rise significantly.

What is most important after “interest rates” in small-cap growth stock investments is “quarterly settlement.”

This is because new businesses have little trust from investors, and only quarterly financial results are a litmus test for investment decisions. Therefore, investors should pay attention only to stocks that have given “good financial results.”

There are three notable points in quarterly financial results: EPS, sales, and guidance, and all three conditions for “good settlement” are financial results that exceed market expectations. Conversely, a “bad settlement” is a settlement where even one of these falls short of market expectations.

＜Examples of good financial accounts＞

・EPS was $1.2 compared to the forecast of $1.

・Sales were 1.2 billion dollars as a result of the forecast of 1 billion dollars.

・As for guidance, new guidance of 5.5 billion dollars was announced compared to the forecast sales forecast of 5 billion dollars for the full year.

When such a “good settlement” is announced, investors can decide whether to “buy” or “buy.” (*This is even after stock prices surged 20% or more immediately after financial results were announced.)

＜Examples of bad accounts＞

・EPS was $1.2 compared to the forecast of $1.

・Sales were 900 million dollars as a result of the forecast of 1 billion dollars.

・As for guidance, new guidance of 6 billion dollars was announced compared to the forecast sales forecast of 5 billion dollars for the full year.

When such “bad financial results” are announced, investors make “sales” decisions. (*Even after stock prices plummeted 20% or more immediately after financial results were announced.)

It is not uncommon for small-cap growth stocks to surge 20% (or plummet) within a day, depending on the details of financial results. Therefore, there is also the idea of buying (or selling) ahead of settlement, but I think this is only effective when other companies in the same industry make good (or bad) settlements one after another.

Also, stocks that have issued good financial results are likely to produce good financial results in the next settlement and the next settlement, while stocks that have issued bad financial results are likely to produce poor financial results in both the next settlement and the next settlement. Therefore, be sure to sell stocks that have had poor financial results immediately.

Beginners in investing tend to fall in love with stocks and believe “if you buy and hold, there is no doubt that it will eventually become a big monster,” but if the end result is WeeWork (WE), which has filed for bankruptcy, the cost is too large and irretrievable.

When investing in small-cap growth stocks, the most important thing after “interest rates” and “quarterly settlement” is the “sales growth rate.”

This is because they invest in small-cap growth stocks in the first place because they invest in anticipation of a large profit from price increases, so they cannot be achieved if the sales growth rate is low.

For example, when small-cap growth stocks become big, in addition to sales and EPS (profit per share) growing rapidly, it is often realized by applying high valuations such as PER 50 times to 100 times, 100 times to 300 times, etc.

Therefore, when investing in small-cap growth stocks, a sales growth rate of at least 25% or more is desirable.

Also, stocks with an accelerated sales growth rate are also good. For example, if the first quarter gradually decelerates to +100%, the second quarter +50%, and the third quarter +25%, there is a high possibility that the fourth quarter has decelerated to the 10% range, and it may not be a growth stock.

On the other hand, if the sales growth rate gradually accelerates to +10% in the first quarter, +15% in the second quarter, and +25% in the third quarter, then the fourth quarter can be expected to remain flat or higher, so it can be said that there is investment interest.

The final deciding factor in investing in small-cap growth stocks is the “chart.”

This is because it is thought that everything, whether fundamentals or investor sentiment, is reflected in stock prices on the chart.

For example, price movements reflect changes in supply and demand, so if prices are rising, whatever the reason, it means that fundamentals are strong, and conversely, if prices are falling, fundamentals are weak.

Therefore, make sure you only invest in stocks that are forming an upward trend. Even if it is a stock that has announced “good financial results,” if the low price is updated and the chart is broken, there is a possibility that there is a problem somewhere, so it can be said that it is wiser to shy away from it.

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Small growth stocks are investment targets with extremely high volatility (price fluctuation rate), so be sure to keep them part of your portfolio.

For example, if you are a prudent investor, use up to 10%, if you are an average investor, up to 20%, and if you are an aggressive investor, use up to 30% as a guide, and keep in mind passive management such as S&P 500 index funds for most of the rest.

If all of their portfolios were managed with small growth stocks, there are many individual investors who would worry about price movements and interfere with their daily lives.

Use 10 to 20 stocks as a guide for the number of stocks you own.

This is because for small-cap growth stocks, only quarterly financial results are a litmus test for investment decisions, so if you concentrate on investing only in 2 to 3 stocks, there is a possibility that you will be forced to sell all stocks in the next quarterly financial results.

However, if you increase it to 30 to 40 stocks, the risk per stock will decrease, and the return will also decrease, so the meaning of investing in individual stocks will diminish.

Again, for small-cap growth stocks, only quarterly financial results are a litmus test for investment decisions. Therefore, when a good settlement comes out, the trading timing is judged to be a “buy” or “hold,” and if a bad settlement comes out, it is judged to be a “sale.” Naturally, funded investments are not possible.

Also, since the holding period also depends on the details of the financial results, while there are stocks that can be bought and held for 2 years or more, there are cases where you have to let go of them after 3 months.

Therefore, investing in small-cap growth stocks takes time and effort to manage financial results, etc., so if you think this is bothersome, it is also effective to use an ETF such as the Vanguard Small Cap Growth ETF (VBK).

Incidentally, at the end of this article, “good financial results” were issued in the most recent quarterly financial results, and some small growth stocks with sales growth rates of 25% or more are excerpted and introduced, so please refer to them.

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When analyzing small-cap growth stocks,App moomoo provided by Moomoo Securities Co., Ltd. It's very useful. In fact, I also use Moomoo when analyzing small-cap growth stocks.

For example, if you want to check the quarterly financial results of Duolingo (DUOL), which operates a language learning application, tap “Analyze” from the menu bar and scroll down to “forecast,” so you can search for predicted and actual values of EPS and operating income (sales).

It can be seen that EPS and sales have exceeded market expectations for at least 3 consecutive quarters.

Furthermore, you can check the quarterly sales growth rate from the “Profit and Loss Statement.” If you look at the graph, you can see that Duolingo has achieved growth of over 40% each fiscal year.

Additionally, if you look at the weekly chart (left figure), you can see that new highs have been updated along with trading volume. Normally, stocks that have updated new highs with trading volume are thought to be likely to rise further from there, so it can be seen that Duolingo is a promising stock in the future.

By the way, if you tap the news (right figure), you can also get the latest news about Duolingo, so I think it's a good idea to check when stock prices move drastically.

good luck.

《Disclosure matters relating to conflicts of interest》

● Stock selection is based on Buffett Taro's own judgment, and we have not received any stock designations from third parties, including Moomoo Securities Co., Ltd.

● There is no serious conflict of interest between the author, Buffett Taro, and the company covered by this document.

“Indications based on the Financial Instruments and Exchange Act”

■ Financial instruments dealer name etc. providing this material to customers Trade names, etc.: Moomoo Securities Co., Ltd. Financial Products Dealer Kanto Finance Bureau Director (Gold Dealer) No. 3335 Member Association: Japan Securities Dealers Association, Japan Investment Advisors Association Member Designated Dispute Resolution Organization: Specified Nonprofit Corporation Securities and Financial Products Mediation Consultation Center