Get Ready for Growth

Comments on “Segmenting Growth Stocks With the G-Score,” by Wayne A. Thorp, CFA, in the September 2022 AAII Journal:

I learned a lot from this article, especially from the data. I’m looking at growth stocks to add to my portfolio when the new business cycle kicks in. Table 1 would be immensely more useful if it were sorted by industry (sector) to make it easier to spot some low-scoring (good) candidates to compare. Table 2 shows only eight candidates left of the original 6,206. By dividing earnings variance by sales growth, we can see which of the stocks with G-Scores of 8 are “10’s.” A lower ratio can be interpreted as a sign of better “quality” management since they are using their skills to get higher “return” (bottom-line earnings per capital invested expenses) per dollar brought in (revenue).
—Barry J. from Texas

Great article! I just recently created a 10-stock portfolio of mostly growth stocks, none of which pay a dividend, and would love to know if there is an easy way to find the G-Score for my 10 stocks. Is this screen available anywhere, or would I need to build my own spreadsheet based on this article?
—Dave G. from Texas

AAII editors respond:
We are developing a new Growth Investing model portfolio and newsletter that will include G-Score values. In the meantime, if you want to create your own spreadsheet, we ran an article in January 2014 on “Calculating Mohanram’s G-Score Using SI Pro and Microsoft Excel.”

Small-Cap Value Ideas

Comments on “Pains and Gains From Small-Cap Value Stocks,” by Paul Merriman, in the September 2022 AAII Journal:

Thank you for another excellent article! If 100% had been invested in equities instead of weighing the portfolios down with bonds, it looks like the returns would have been even better. And I really appreciate the link to the Lifetime Investment Calculator. I always like to play with what-if scenarios.
—Robert A. from North Carolina

I would suggest only three small-cap value exchange-traded funds (ETFs): Avantis U.S. Small Cap Value ETF (AVUV), iShares US Small Cap Value Factor ETF (SVAL) and Vanguard Small-Cap Value Index ETF (VBR), in equal proportion, to generate a satisfactory result.
—Prakash J. from Mumbai, India

Paul Merriman responds:
Avantis U.S. Small Cap Value is the ETF we have selected as best In class for U.S. small-cap value. For Vanguard, I prefer the Vanguard S&P Small-Cap 600 Value ETF (VIOV) over VBR. Another very fine small-cap value ETF is DFA’s Dimensional US Small Cap Value ETF (DFSV).

Stock Buybacks

Comment on “Expectations Matter When It Comes to Growth Investing,” Charles Rotblut’s Editor’s Note in the September 2022 AAII Journal:

Rotblut states: “As of mid-August, more than 1,100 corporations in AAII’s Stock Investor Pro fundamental stock screening and research database have a buyback yield equal to or greater than 1%.”

This caused me to take a look myself with Stock Investor Pro (a wonderful investment tool!). I created a custom field called “Y1 net tangible assets” to exclude asset accounts that are posted with the “leftover” amounts paid out in an acquisition that cannot be explained by the appraisers hired to assign the cost to assets purchased. I came up with the following statistics: Only 233 (46.6%) of the 500 companies in the S&P 500 index have a buyback yield equal to or greater than 1%. And of those 233, there are only 129 (55.4%) that have positive values for year 1 net tangible assets.

In other words, for almost half of those 233 buybacks by S&P 500 companies, a review of year 1 financial information in the database shows that when “goodwill and intangibles” are excluded, the remaining shareholders were left with a greater share of the company’s net deficit equity. It seems to me a company should pay out its cash to reduce its deficit by reducing its liabilities, which would benefit all shareholders instead of just the privileged few who are allowed to exchange their shares for the cash.
—Michael D. from California

Importance of Expense Ratios

Comments on “Expense Ratios Can Make or Break Your Portfolio,” by Zach Banning, in Dispatches in the September 2022 AAII Journal:

The answer [to IRAs experiencing lower returns than identically invested 401(k) plans] is to buy low-expense-ratio ETFs when you roll over to an IRA. Or if you’re a mutual fund diehard, then at least pick those with tiny expense ratios. There’s no need to pay more than 0.1% for any fund. It’s been my experience that the small choice of funds in 401(k) accounts charge way more than those I’ve bought in my Roth IRA account.
—Robert A. from North Carolina