We must ensure the U.S. remains the Land of Opportunity, and I sincerely believe that many of President-elect Donald Trump’s policies can help achieve that goal.
Trump has pledged to cut corporate taxes, slash regulations, boost infrastructure spending and repatriate overseas profits—all of which can help foster an industrious biosphere.
It’s also bullish for domestic equities.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
Since Election Day, the S&P 500 Index has surged 6.5 percent, and although I’ve seen many headlines proclaiming the so-called Trump rally overdone, I believe there’s still plenty more upside potential. As the saying goes: “Equity bull markets don’t die of old age.”
We’re committed to taking advantage of this upside, which is why we’ve adjusted and dramatically improved the methodology for our two domestic equity funds, the All American Equity Fund (GBTFX) and the Holmes Macro Trends Fund (MEGAX).
Briefly, I want to talk a little about each of the fund’s new methodology to give you a better idea of how they’re set up to capture opportunity in the year ahead and beyond.
All American Equity Fund (GBTFX)
Among other new additions to our methodology, we seek to capture the performance of the “growthiest” companies in the fund’s benchmark, the S&P 500, by focusing on those whose most recent quarter’s sales per share is greater than the average of the previous four quarters. So if a company’s average sales per share for the past four quarters is $30, let’s say, it needs to show something higher than that in the current quarter to be considered.
We want the most active, productive companies on a per-share basis, and we’ve found that sales per share (also known as revenue per share) is one of the best ways to measure this.
To screen for overleveraged firms, we eliminate companies with the highest debt to equity.
We also screen for companies whose cash flow return on invested capital (CFROIC)—one of Warren Buffett’s favorite factors—is above the average for the S&P 500 over the past 12 months.
Holmes Macro Trends Fund (MEGAX)
The benchmark for MEGAX is the S&P 1500 Composite Index, which introduces small- and mid-cap stocks to our universe of investable companies. These stocks have been among the best performers since the November election because Trump’s more protectionist policy proposals bode well for companies that have less exposure to overseas markets than large, multinational blue-chip stocks. (The president-elect has threatened to impose a “big border tax” on American goods made overseas and shipped back into the U.S.)
Small- and mid-cap stocks are an exciting place to be right now. As you can see, they’ve rallied dramatically above the S&P 500 since the election, after performing in tandem with blue chips for the past few years.
Mid-cap companies are especially attractive because they’ve reached a point in their enterprise life cycle where the challenges inherent to smaller companies—raising capital early on and managing capacity growth, for example—are mostly behind them. At the same time, they remain dynamic enough for rapid growth to be possible.
That’s why mid-cap stocks account for 40 percent of our new MEGAX model. Meanwhile, 36 percent is in small caps, the remaining 24 percent in large caps.
To screen for the very best companies, we take a similar approach as GBTFX, focusing on those whose sales per share is greater than their average for the past four quarters.
Then, we do some trimming.
We remove the bottom fifth of companies with the lowest growth in the most recent quarter’s return on invested capital (ROIC). We do the same with those that have the lowest gross margins and lowest revenues per employee.