• Growth by itself does not generate excess returns — profitability matters.
  • The global economy began returning to normal in 2021, and so did the relative investment returns provided by growth strategies.
  • While trendy growth stocks grab headlines (and sometimes generate fast money for speculators), we believe that quality companies make for good investments.

A positive relationship between revenue growth and the price of company’s stock likely seems intuitive. It follows, then, that rising sales should lead to growing profitability, which should result in a rising stock price.

Consider, for example, a coffee shop. Opening a second location just a few blocks down the same street as the first location would provide a second source of sales and, theoretically, an increase in revenue.

However, the reality may not be as lucrative as the theory. With a choice of two coffee shops just a short stroll from each other, some customers would likely switch from the first location to the second—resulting in zero revenue growth. Even if the second location attracts new customers, rather than simply offering existing customers an alternative location at which to make their purchases, successful businesses tend to attract competitors. As newcomers attempt to imitate the original shop’s approach, a fall in prices and obtainable profit margins is not necessarily imminent but almost always inevitable. Even businesses that manage to dominate their competitors and achieve long-term success can face challenges. For example, a company that develops a dominant market share may attract regulatory scrutiny — and such oversight could curtail business activity or even break up successful business models.

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Glossary

  • Buybacks occur when a company buys its own shares back to reduce the number of shares outstanding on the open market. 
  • Dot-com bubble refers to a period in the late 1990s characterized by a rapid rise in U.S. technology stock valuations, especially internet-based companies. 
  • Forecasted medium-term growth refers to estimates for company growth anywhere from two to 10 years in the future. 
  • Historical prices are the recorded prices of an asset for a range of dates in the past. 
  • Intangible asset accounting records an asset as a long-term holding and then amortizes the asset over its useful life.
  • Price-to-book ratio compares the market capitalization of a company to its net assets.
  • Sales per share is calculated by dividing a company’s total revenue by it total shares outstanding. 

Index Definitions

  • Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe.
  • Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe.
  • Russell 2000 Growth Index measures the performance of the smallcap growth segment of the U.S. equity universe.

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