Buffett Taro's Extreme Secrets to Investing in US Small Growth Stocks
<Table of Contents>
Reasons for the era of small cap growth stocks coming
・End of the GAFAM boom and halt of interest rate hikes
Two important things in small growth stock investment
・Interest rates, quarterly earnings, revenue growth rate, and candlestick charts
Points to be careful of in investing in small cap growth stocks
・Portfolio, number of holdings
・Trading timing and holding period
How to analyze small growth stocks on moomoo
List of 5m Small-Cap Growth Stocks (20 carefully selected stocks)
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The era of small-cap growth stocks is coming
I am Buffett Taro.
There is a long-term upward trend in the global stock market over a period of 10 years.
1950s: German Stock Boom
1960s: U.S. Stock Boom
1970s: Gold Boom
1980s: Japan Stock Boom
1990s: Dot-com Boom
2000s: BRICs Boom
2010s: GAFAM Boom
Considering that each of these booms eventually faced long periods of stagnation in the following eras, it is natural to assume that GAFAM, which boomed in the 2010s, may face a long period of stagnation in the future.
In fact, Apple's July-September revenue growth rate was -1% compared to the same period last year, marking four consecutive quarters of negative growth, showing a lack of former momentum.
Also, considering that the top five GAFAM stocks account for approximately one-fourth of the market capitalization of the S&P500, if GAFAM were to face a long period of stagnation, it could weigh heavily on the S&P500. In other words, passive investment in S&P500 index funds may have a high potential to enter a winter period.
However, this does not mean that all U.S. stocks are bad.
For example, there are many growth stocks in US stocks with a revenue growth rate of over +30% compared to the same period last year, so by investing in such growth stocks, you can aim to maximize your assets.
Especially considering that Chairman Powell of the FRB hinted at a halt to interest rate hikes at the November FOMC, it is highly likely that as the multiple expansions (rise in PE) occur in the future, small growth stocks with high PEs will become more popular.
However, when investing in small growth stocks, investment skills are required. Therefore, I will introduce "Buffett Tarou's Secrets to Investing in US Small Growth Stocks".
Two important things in small growth stock investment
<Interest Rates>
The most important thing in investing in small growth stocks is "interest rates".
Therefore, with Chairman Powell hinting at a halt to interest rate hikes at the November FOMC, it can be considered that the era of small growth stocks has arrived.
Why is interest rate important? That is because interest rates have a significant impact on a company's price (market capitalization).
First of all, the company's price can be determined by a simple formula of 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 will be 33.
Next, if C is 100, r is 4, and g is 2, the company's price will be 50.
This means that when the discount rate (interest rate) decreases, the company's price increases.
Also, if C is 100, r is 2, and g is 1, the company's price will be 100.
In other words, even if the growth rate drops, if the discount rate (interest rate) falls significantly, the company's price will rise.
By the way, if you set C as 100, r as 7, and g as 3, the company's price will be 25.
This means that if the discount rate (interest rate) rises significantly, the company's price will fall even if the growth rate increases. In fact, in 22, the FRB raised interest rates rapidly, causing small growth stocks to plummet across the board.
However, the fact that Chairman Powell hinted at halting rate hikes at the November FOMC suggests that the next action is likely to be "monetary easing" rather than "monetary tightening."
In other words, since there is a high likelihood of a decrease in the discount rate (interest rate) after 24, it can be said that the company's price is more likely to rise. Especially, small growth stocks with many high PE ratios are expected to benefit from the decline in interest rates, leading to a significant increase in stock prices.
<Quarterly Earnings Reports>
One of the most important things after "interest rates" in small growth stock investment is "quarterly earnings reports."
This is because new businesses have fragile trust from investors, making quarterly earnings reports the only yardstick for investment decisions. Therefore, investors should pay attention only to stocks that have released "good earnings reports".
The three key points to focus on in quarterly earnings are EPS, revenue, and guidance. The condition for a "good earnings report" is when all three of these exceed market expectations. Conversely, a "bad earnings report" refers to when any one of these falls below market expectations.
<Good earnings report example>
- EPS was $1.20 compared to an expected $1.
- Revenue was $1.2 billion compared to an expected $1 billion.
- Guidance announced a new revenue forecast of $5.5 billion, exceeding the expected $5 billion annual revenue.
In the event of such a "good earnings report," investors can make a "buy" or "hold" decision. (Even if the stock price soars by more than 20% immediately after the earnings announcement.)
<Poor earnings report example>
- EPS was $1.20 compared to an expected $1.
Sales revenue was $1 billion, compared to an estimated $0.9 billion.
Guidance: The full-year sales revenue forecast was $5 billion, but the new guidance announced $6 billion.
When such 'poor earnings reports' are announced, investors make a 'sell' determination. (Even immediately after the earnings announcement, even if the stock price drops by 20% or more.)
Depending on the earnings report, small-cap growth stocks can rise (or fall) by 20% in a single day, which is not uncommon. Therefore, the idea of buying (or selling) ahead of the earnings is valid only when multiple companies in the same industry report good earnings (or poor earnings).
Furthermore, stocks that report good earnings are likely to continue to do so in the following quarters, while stocks with poor earnings are likely to continue to report poor earnings in the future. Therefore, it is advisable to sell immediately the stocks that report poor earnings.
Beginner investors tend to fall in love with stocks, believing that by 'buying and holding' they will eventually hit it big. However, the unfortunate fate of WeWork, which filed for bankruptcy, shows that the consequences can be irreversibly severe.
<Revenue Growth Rate>
When investing in small-cap growth stocks, after 'interest rates' and 'quarterly earnings', the next important factor is the 'revenue growth rate'.
The reason to invest in small growth stocks in the first place is to expect significant capital gains, so if the revenue growth rate is low, this cannot be achieved.
For example, small growth stocks tend to skyrocket when their revenue and EPS (earnings per share) are growing rapidly, and when their PE ratio is given high valuations like 50 times to 100 times, or 100 times to 300 times.
Therefore, when investing in small growth stocks, a revenue growth rate of at least 25% or higher is desirable.
It's also good to invest in stocks with accelerating revenue growth rate. For example, if the first quarter is +100%, the second quarter is +50%, and the third quarter is +25%, then the fourth quarter is likely to decelerate to the 10% range, which may no longer qualify as a growth stock.
On the other hand, if the revenue growth rate accelerates gradually, like the first quarter at +10%, the second quarter at +15%, and the third quarter at +25%, then the fourth quarter can be expected to be stable or even higher, making it an attractive investment.
<Candlestick>
The final deciding factor in investing in small growth stocks is the 'candlestick'.
This is because it is believed that everything, whether fundamentals or investor psychology, is reflected in the stock price.
For example, price movements reflect changes in supply and demand, so if prices are rising, it means strong fundamentals regardless of the reason, and conversely, if prices are falling, it means weak fundamentals.
Therefore, it is advisable to only invest in stocks forming an upward trend. Even if a stock announces 'good earnings', if it is making new lows and the chart is breaking down, there may be underlying issues, so it would be wise to avoid investing.
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3 points to note in investing in small growth stocks
<Portfolio>
Small growth stocks are highly volatile investments, so please keep them as a part of your portfolio.
For example, if you are a cautious investor, aim for up to 10%, if you are an average investor, up to 20%, and if you are an aggressive investor, aim for up to 30%, and focus on passive management such as S&P 500 Index funds for the majority of your holdings.
If you invest all your portfolio in small growth stocks, many individual investors end up being concerned about price movements, impacting their daily lives.
<Hold Positions Count>
Please aim to hold around 10 to 20 positions.
Because small-cap growth stocks are judged mainly by quarterly earnings reports, if you concentrate your investments in only 2 to 3 positions, you may be forced to sell all positions in the next quarter's earnings reports.
However, by increasing the number of positions to 30 to 40, although the individual risk per position decreases, the return also diminishes, thereby weakening the rationale for individual stock investments.
<Trading Timing and Holding Period>
Repeatedly, small-cap growth stocks are judged mainly by quarterly earnings reports. Therefore, when good earnings are announced, it is considered a "buy" or "buy and hold" decision, while bad earnings results in a "sell" decision. Naturally, dollar-cost averaging is not applicable.
Furthermore, the holding period depends on the earnings content, allowing for positions that can be held for over 2 years, while some may need to be sold off after 3 months. Therefore, investing in small-cap growth stocks requires effort in scrutinizing the earnings, and if you find this bothersome, utilizing ETFs like Vanguard Small-Cap Growth ETF (VBK) can be beneficial.
Investing in small-cap growth stocks requires meticulous examination of earnings, making it cumbersome. If you find this cumbersome, utilizing ETFs like Vanguard Small-Cap Growth ETF (VBK) can be effective.
By the way, at the end of this article, we have extracted and introduced some small growth stocks with 'good results' in the latest quarterly earnings report, with revenue growth rates of 25% or more, so please take a look.
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How to analyze small growth stocks on moomoo
When analyzing small growth stocks,The app moomoo provided by moomoo Securities Co., Ltd. is very convenient. In fact, when analyzing small growth stocks, I also use moomoo.
For example, if you want to examine the quarterly earnings of Duolingo (DUOL), a language learning app operator, you can tap on 'Analysis' from the menu bar, scroll down, and find 'Predictions', where you can check the forecast and actual values of EPS and revenue (revenue).
It is evident that for at least three consecutive quarters, the EPS and revenue have exceeded market expectations.
Furthermore, from the 'income statement,' you can check the quarterly revenue growth rate. By looking at the graph, it can be seen that Duolingo has achieved growth exceeding 40% every quarter.
In addition, when you look at the weekly candlestick chart (left diagram), you can see that it is setting new highs with volume. Typically, stocks that set new highs with high volume are considered to have a high potential for further increase. Therefore, it is understood that Duolingo is a promising stock for the future.
By the way, if you tap on the news (right diagram), you can also get the latest news about Duolingo. So, it is recommended to check this when the stock price is moving significantly.
Good luck.
List of 5 small-cap growth stocks (carefully selected 20 stocks)
Disclosure on Conflicts of Interest
● Stock selection is done based on Buffett Taro's own judgment, and there is no designation of stocks from third parties, including moomoo Securities Corporation.
● There is no significant conflicting interest between the author Buffett Taro and the companies covered in this document.
《Display items based on the Financial Instruments and Exchange Act》
■ Name of the financial instruments business operator providing this document to customers: moomoo Securities Co., Ltd. Financial Instruments Business Operator, Director of Kanto Finance Bureau (金商) No. 3335 Member Associations: Japan Securities Dealers Association, Japan Investment Advisers Association Designated dispute resolution body: Specified Nonprofit Organization Securities and Financial Products Mediation Center
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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