Not all growth companies deserve the name
Along with much of the stock market, Dock Street portfolios have suffered in the last week as active traders focus on the threat of rising interest rates. These same active traders are sitting on fat profits from the massive increase in stock prices since the low set in late March of 2020. When the gains in portfolios pile up at the end of the year, many investors wait until the new tax year to sell. We think explains much of the recent weakness.
The selling has been most intense in much of the technology sector. The headlines tell us that “growth stocks” are suffering most.
But broadly, there are two kinds of growth stocks—those with rising profits that can be measured and those without current profits, but very high sales growth. Investors (speculators?) can be attracted to companies with high sales growth in the hope that at some point the profits will be produced. The Pandemic produced an entire class of “disruptive” businesses that fit this model.
Stocks in our portfolios produce growing profits, as sales increase. And those profits are in cash—not something to take for granted. We believe that over time the superior earning power of our portfolio companies will be recognized and rewarded.
But given the powerful results in our portfolios and the market in the last five years, it should surprise no one if 2022 turns out to be a difficult year. Of course, if you go back and read what we were saying early in 2021, that warning would sound very familiar. Goes to show how useful short term predictions can be. Better to focus on what works over long periods of time.
Daniel A. Ogden