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Marc Zuccaro B. G., Opalesque Geneva:
According to Golden Eagle Strategies, a boutique investment firm in the U.S., stocks undergoing hypergrowth produced an annual weighted average return of 37% during 2009-2022, compared to the "rapid growth" stocks' return of 26% and the S&P 500's return of 13% in the same period.
The introduction of new technologies spawned hypergrowth stocks, that is, stocks of companies that record sales growth of at least 40% for one year or more. It has allowed some companies to expand and scale at rates never before possible - a feature of the so-called Fourth Industrial Revolution. With the proliferation of artificial intelligence and other technological advancements, hypergrowth rates should flourish in the world landscape, the manager says.
Marc Zuccaro, Managing Principal and Portfolio Manager for the Golden Eagle Growth Strategy, which takes a concentrated approach to investing in high-growth and innovation-driven equities, says a systematic approach is essential to monitoring for rapid revenue and price appreciation. The Hypergrowth section of the equity world is riskier and more volatile, but if you have time on your side, you can generate sizeable alpha - and diversification as hypergrowth is not limited to tech companies. Stock investors should have a proportion of their portfolio in hypergrowth, he says, as an overlay to achieve alpha. But beware of market timing, he adds. Investing in Hypergrowth is a long-term proposition. In this interview, he explains the ins and outs of this uncommon asset class.
Opalesque: Why do you believe Hypergrowth Stocks are a hidden gem in the growth stock class?
Marc Zuccaro: Hypergrowth has only recently emerged from the ability of companies to use technology to scale their operations faster than ever before. Investors didn't see a lot of companies with extreme growth rates in the past because companies were constrained by how much they could physically produce. But as we have moved into an economy leveraged by technology and intellectual property, the top tranche of growth companies has really accelerated - companies can double or triple their sales over the course of a year, which was not feasible before.
Historically, our research was always geared towards growth stocks, particularly the upper end or aggressive growth range. We knew that the higher the growth rates, the more potential upside a stock had. However, we uncovered a segment that wasn't named until the recent era; the term hypergrowth, in relation to companies and stocks, was only coined about 15 years ago.
Our research puts academic theory into practice - capital asset pricing (CAPM) holds that riskier assets deliver higher returns. So, we started to segment growth stocks further to understand why they outperform the broader market. Within that research, we identified the ability to isolate good hypergrowth stocks. Indeed, the businesses that are growing the fastest can have the highest stock price appreciation. Additionally, hypergrowth stocks behave differently than other areas of growth, and having that knowledge is key to harvesting substantial upside.
Opalesque: What makes Hypergrowth Stocks so difficult to capture?
Marc Zuccaro: The challenge with Hypergrowth Stocks is that their acceleration may happen quite quickly - it can occur in short spurts. A systematic approach is essential to monitoring for rapid revenue and price appreciation. The typical fundamental approach is laborious and sub-optimal, so managers should be open-minded about where to find the best stocks. Additionally, many hypergrowth stocks cannot be characterized by their EPS or bottom line. A company's sales growth often gives a clearer account of its trajectory.
Hypergrowth happens across all sectors at different times through the stock market. If a manager is focused on just one sector, they're going to miss out on the vast majority of hypergrowth stocks in a given cycle. For example, the most extreme sector concentration in hypergrowth we've ever seen was 40% and it wasn't even in technology! (It was financials in 2009).
Opalesque: Are Hypergrowth Stocks typically technology stocks?
Marc Zuccaro: This question comes up all the time. When you mention hypergrowth, people immediately associate that with tech or biotech. Hypergrowth occurs in all segments of the economy and at all times. Yes, there is technology involved, and technology is a key feature driving companies into hypergrowth states, but technology companies themselves comprise only a small part of the hypergrowth spectrum.
Over the past years, our portfolio has only been 15 to 30% technology. People find it surprising that our portfolio is not heavy in Magnificent Seven stocks. But we're really investing in companies that are less likely to be household names, operating in all segments of the economy. Healthcare, energy, finance, consumer discretionary and even materials have a lot of Hypergrowth Stocks.
Opalesque: Given that Hypergrowth Stocks can be quite volatile, does that make them a risky investment?
Marc Zuccaro: A lot of people associate risk with volatility. In fact, the alternative industry is built on mitigating risk or making investments less volatile because that's what many people want - it's an emotional reaction to investing. But in reality, the only way to generate outsized returns is to accept some level of volatility.
The more volatile assets do generate higher returns - again that goes back to the capital asset pricing theory. Yes, stocks or any asset may go down in price for a period of time, and they may go down quite sharply. But time mitigates that risk. That's the key feature here - the data clearly show that growth stock investing delivers the highest returns.
When you are investing in riskier assets, if you have time on your side, you can generate sizeable alpha. But you cannot make decisions to get in or out of riskier assets on your own and consistently win - that's market timing.
Opalesque: How do Hypergrowth Stocks complement a typical portfolio?
Marc Zuccaro: If you're investing in stocks, you should have some proportion of your portfolio in hypergrowth. It's an overlay to all other methods of allocating across equities. Layering in hypergrowth does not skew a portfolio towards any one sector, theme or capitalization range - hypergrowth is agnostic. But you get the benefit of return enhancement without over-allocating to a traditional sector.
The average investor will invest heavily in indices, but choosing sectors and themes requires timing the market properly. The reality is that 91% of managers underperform their benchmark over 10 years. If you're not investing in an area such as hypergrowth, you will likely underperform your benchmark.
Opalesque: Are there certain market environments that are more or less conducive to Hypergrowth Stocks?
Marc Zuccaro: Like any other market segment, there are performance cycles, and hypergrowth will also occasionally underperform. But market timing is a very unproductive tool for investment management and it's important to be investing through the cycles and over the long term.
Hypergrowth is more volatile than other segments, but when investing for long periods of time, hypergrowth buys you more upside volatility. Stock market returns are really compressed into small periods of time, so it's more important to stay invested in a good asset rather than selling it during a soft period, and reallocating to something else at a higher level.
Opalesque: Why don't more investors and managers know about Hypergrowth Stocks?
Marc Zuccaro: Managers typically allocate by sector or theme, and many are not looking at investments in terms of growth rates. If you search 'hypergrowth' on the internet, the few results that appear have little connectivity to a discernible theme - we have applied science to our approach.
Because hypergrowth stocks can occur in many industries, investing across hypergrowth can actually be a diversifying feature. Using our revenue-based approach also allows us to work with companies that are not yet profitable but still have huge upside potential - this is a group of stocks that tends to confound many managers and scare traditional investors.
One thing that differentiates us is while we trade every month, we snapshot the market every single day. We look at every single tradable stock in the US market. We have decades of data with this information, and we can take a much higher-level view of the stock market because we don't use the same type of subjective analysis that many managers use. We're unique because we use a data-backed approach to segment the market differently, and we extract value that others have not found.
Opalesque: Are there many other investors who have a clear focus on Hypergrowth Stocks?
Marc Zuccaro: We are not aware of anybody else who looks at the market the way we do. We're very specific and systematic about distilling hypergrowth stocks into our Growth Leaders List, which is the subset of stocks that we're interested in, and we're even more disciplined about which stocks we put into the portfolio.
This is a corner of the market that we feel we truly understand. Hypergrowth is an uncommon term, but we're trying to change that. We're trying to show people that looking at the markets our way has real value.
Related:
Jul.2021 Zuccaro's Golden Eagle Strategies celebrates one-year anniversary with new name and expanded management team
May.2021 Opalesque Exclusive: The party is not over for growth stocks
Oct.2020 Opalesque Exclusive: Stock scientist's new aggressive growth fund up 22% MTD
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