Author: Bob Gay, GEARS

Covestor model: Speedboat

The Speedboat portfolio’s investments are focused on higher growth and accelerating companies. This is typically a small population, since to sustain high and rising rates of growth for long periods is very difficult. We are capturing companies during the acceleration phase of the growth cycle and making buy decisions for depressed shares.

My analysis of third quarter financial statements suggests that the recovery leadership is shifting from consumer durables spending to capital goods spending. Corporations are investing in new property, plant and equipment at a faster rate in the third quarter and now free cash flow has declined for the first time since 2006. Historically, this shift to capital goods spending and the need fund these purchases with asset sales or financing has been associated with higher commodity prices, higher inflation and higher interest rates. Here on my personal site is a brief recording with a review of the third quarter numbers.

For now we appear to have entered in the acceleration stage of the corporate growth cycle. Even after the recent rally, shares are still depressed and we are increasing exposure to stocks and reducing investments in fixed income securities.

What constitutes high growth is a function of the growth rate of the average company. In the past year, American companies produced strong average sales growth and cash flow growth even higher than that. This places the growth bar very high. Although the population of companies that clear the bar is quite large as we trace out the acceleration phase of the cycle, finding depressed shares in that high growth population is rare.

The higher stock market volatility in recent months provides more frequent opportunities and with the third quarter financial statements mostly collected now, I am in a good position to structure the Speedboat model for growth and acceleration. The intention is to keep the concentrated list in high growth companies with acceleration characteristics and make purchases when shares are depressed.

Over the next few weeks my focus will be on broadening the exposure of the portfolio, reducing the leverage and lowering the exposure to some of the larger positions.