For the first time in what feels like an eternity, value stocks are topping their growth rivals, but investors can avoid value clunkers and bet on a growth rally with the ERShares Entrepreneurs ETF (ENTR).
The ERShares fund is worth a look over the near-term because its growth stocks are offering surprising levels of value.
“With the market keeping a keen eye on interest rates and its focus on punishing high-flying growth stocks with every basis point increase in the 10-year treasury, it’s sometimes useful to take a step back and examine the big picture,” said ERShares founder Joel Shulman in a recent note. “While it’s true that stocks, of all kinds (growth and value), are fundamentally priced based on discounted future cash flows, it should not necessarily be true that growth stocks should receive a steeper drop in price with rising interest rates. While the basic math of reducing today’s stock price based on discounting future cash flows at a higher rate cannot be denied, neither can the fact that the PRIMARY driver in growth stock valuation is the GROWTH itself.”
ENTR tries to reflect the performance of the Entrepreneur 30 Index, which is comprised of 30 U.S. companies with the highest market capitalizations and composite scores based on six criteria referred to as entrepreneurial standards. ENTR primarily invests in US Large Cap companies that meet the thresholds embedded in their proprietary Entrepreneur Factor (EF).
ENTR: A Prime Avenue for the Growth Rebound
ENTR also includes sophisticated screens to weed out undesirable companies. The factors screened include management, which requires set factors regarding a company’s management, such as the turnover among the top five executives within a company compared to other companies in the broader universe. A profitability screen requires a company to meet predetermined criteria regarding net income over a static threshold to be included, including the company’s net income as compared to predetermined benchmarks.
“When businesses enter their hyper-growth phase, they enter an extremely uncertain period and seasoned analysts should already discount future cash flows at an appropriate level corresponding to the risk,” adds Shulman. “The key drivers to the valuation of growth stocks correspond overwhelmingly to the top-line revenue growth (that can exceed 100% rate per year) and should not, from the same mathematical perspective be affected by relatively immaterial or insignificant 5-10 basis point increases in a discount rate.”
The bottom line is thus: recent weakness in growth stocks may be an overreaction to rising Treasury yields.
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