Finding Growth Stocks In The Teeth Of A Bear Market

Financial statement updates for the third and pre-election quarter will begin soon. Corporate growth is falling very broadly and on average. Only a few of the largest companies are recording a sales growth improvement in the recent second-quarter update now complete.

The third quarter will give us some evidence of the timing of a recovery from the recent growth decline that began in the third quarter of 2018. What will be of most interest is the decline in the average gross profit margin. An unusually large proportion of US companies are recording a decline. The gross profit margin is a valuable predictor of share prices.

The recent increase in share prices is a recovery rally in a downtrend and should be used to sell shares of companies with falling growth. The current extended share prices are reflecting unusually low interest rates that support stock values relative to sales of 2.3 times. That is the highest price to sales since the peak of the tech bubble in 2000. Extended share prices are also indicating that investors are expecting that growth will rebound shortly and strongly. Evidence from the second quarter indicates the opposite.

That makes the third-quarter financial statement updates more useful than ever. If we see an increase in the frequency of improvement in sales growth and an increase in the frequency of improving gross profit margins, it is more likely than a recovery is underway. Otherwise, the recent share price advance is vulnerable.

Major Bear Market

We are in the teeth of a major bear market now. Average sales growth is down to 6% from 14% at the peak in 2018 and still high relative to 2.2% at the lowest point in 2002 (post tech bubble) and -9% in 2009 (post financial crisis). This decline is so broad and so deep and from such a high level, the bottom is nowhere in sight. Meanwhile, a very weak financial condition makes the survival of many companies unlikely.

Sell falling growth companies now while prices are at a premium. Own only stocks of companies with exceptional attributes. Expeditors International of Washington Inc (Nasdaq: EXPD), which is demonstrating a quality growth pattern with strong fundamentals. Visit Otos.io for more information on how Otos communicates changing fundamentals attributes with the MoneyTree avatar (See Expeditors International’s ’s MoneyTree below).

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