What to Buy when Market Growth is in a Free-Fall?

This last week Otos.io completed the second quarter update of U.S. company financial statements. New data is always exciting but the anticipation in peeling-the-onion this time is like no other.

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Q2 2020 hedge fund letters, conferences and more

Share prices are near to ‘all-time highs’ and corporate growth is down steeply and broadly. What gives? The clue is in the internal market performance where shares of companies that are expected to sustain or improve growth through the virus have doubled and tripled and companies with growth falling are more commonly down and many at historical lows.

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As interest rates approach zero, the value of positive-growth assets approaches infinity. That has created the highest valuation ever for a small number of growth stocks that have come to dominate the stock market performance since the virus appeared.

Looking at 3 years of Corporate Growth Decline

Using our data history of corporate growth cycles, this decline which is now two years old, should soon show signs of improvement. Declines of ‘three-years’ are not unusual but ‘two-year’ declines are more common in recent decades. In recent weeks, the stocks market leadership has shifted from tech to industrials and back again as expectations about the shape and timing of the recovery eb and flow.

Broadly, the second quarter showed company growth in free-fall with no end in sight. The earliest evidence of improvement at cycle lows historically, has been an increase in the frequency of improving sales growth. Last quarter the proportion of market capital accounted for by rising sales growth companies was 40% down from 50%. In the same quarter the proportion of companies achieving an improvement in sales growth dropped to 25% from 32% last period. That illustrates that a small number of the largest companies is dominating the growth numbers and the stock market creating a growth gap.

Growth Gap & Inflation

The growth gap must close. The question is when and the evidence is-not yet. Use the recent stock market strength to sell falling growth companies at extended share prices. Focus your stock portfolio on companies with exceptional attributes. At some point we will need to invest in recovery and protect from the inevitable inflation that will accompany it. The third quarter numbers (complete in November) and the end of the current US government might provide a light for the path ahead.

Own only stocks of companies with exceptional attributes. Pegasystems Inc., which is demonstrating a recovering growth pattern with improving fundamentals. Visit Otos.io for more information on how Otos communicates changing fundamentals attributes with the MoneyTree avatar (See Pegasystem’s MoneyTree below).

Pegasystems Inc. $118.860 BUY this rich company getting better

Pegasystems Inc. (NASDAQ:PEGA) has been a profitable company with inconsistently high cash return on total capital of 11.2% on average over the past 21 years. Over the long term the shares of Pegasystems Inc have advanced by 402% relative to the broad market index.

The shares have been highly correlated with trends in Growth Factors. Among the dominant factors in the Growth group, Cash Flow from Operations (ROI) has been 81% correlated with the share price with a five-quarter lead. Currently, sales growth is 12.4% which is low in the record of the company but higher than last quarter. The shares have been highly correlated with the direction of sales growth.

The company is recording a rising gross profit margin. Costs have been steady since 2019 as seen by a flattening of the SG&A expenses relative to sales. Expense reductions are not limitless however the company continues to manage further cost containment. The stronger profit margins and continuous reduction in costs has been supporting cash flow and EBITDA growth and creating a resurgence in Free Cash Flow growth.

More recently, the shares of Pegasystems Inc have advanced by 102% since the December, 2017 low. The shares are trading at upper-end of the volatility range in a 33-month rising relative share price trend.

Despite the extended share price, the fundamental attributes strongly support the current valuation and possibly provides a good opportunity to buy the shares of this evidently accelerating company.

Investor advice

Buy stocks of companies with sales growth up, rising gross profit margins, lower SG&A expense and good financial condition (Stable Golden Pot) and improving cash position or profitability (Green Crown of the MoneyTree). In other words, the more stable the pot appears, the better the attributes. Green and gold are good. Red is bad and the more intense the red the more urgent the call to action.

Pegasystems

Pegasystems

PEGA

PEGA