A Macro Growth Story

by Wayne Ferbert on December 22nd, 2011

I have always been a value investor. I follow many value strategies and admire Warren Buffet’s investment acumen. My style usually drifts towards beaten down stocks and sectors – which is why I use hedging techniques to better stomach those investments. So, when I write about a growth investment, it is time to take notice.

I really like U.S. mid-cap growth as an asset class and style right now. And my reasons are mostly fundamental in nature.

After the credit crisis of 2008 and 2009, it became difficult for small cap companies to raise capital to invest in their business. In fact, that difficulty continues today. Capital markets have started to open up for small cap companies but the capital is very expensive – even more than usual.

Meanwhile, the capital markets always remained open to mid-cap and large cap companies – even if the capital was more expensive than usual for them also.

My investment hypothesis is the following: the companies that will grow market share for the next 3 years will be the firms that have the following two characteristics: (1) invested capital in their business in the last 2 years; and (2) can be nimble in competitive markets.

I think we already can look back on the last 2 years and see that few small cap companies have made the business investments they usually would make. So, mostly large cap and mid-cap companies made these types of investments. So, these firms are positioned to take market share.

So, which firms are more nimble: large cap or mid-cap? Do I really need to answer that? I have worked in both in my past. And I can tell you, rarely are large cap firms very nimble. It is just the nature of the beast.

So, the firms positioned to take share (and have been taking share the last 2 years) are mid-cap firms. And if they are aggressively investing in their businesses, then they are likely growth firms.

My conclusion: the style I really like now is U.S. mid-cap growth. An ETF that tracks this index is the MDYG – a State Street ETF.

Let’s look at the recent performance of this index compared to the S&P500 and to the mid-cap value sector:
As you can see, the mid-cap growth sector has nicely out-performed the other two categories for several years now. That technical out-performance slightly worries me as all trends eventually reverse themselves.

But in this case, for the reasons above, I really believe that this trend will persist. Hopefully, I am not too late to the trade. Maybe the market has already baked in a similar hypothesis.

To be safe, it makes sense to hedge the position. Build in some downside protection – the way any smart Buy And Hedge investor would!

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