A vast majority of our articles are based on conservative or income-oriented strategies mostly focused on retirees, near-retirees, or folks who are within 10-20 years of their retirement. But at the same time, we like investing a limited portion of our portfolio in “high-growth strategies.” Please note the emphasis on the word “strategies” and not stocks. Rather than focusing on fast-growing stocks, which are easy to spot in hindsight but very difficult to identify with any amount of certainty when it comes to the future, we recommend investing in high-growth strategies.

Wall Street runs on fear and greed. So, many investors, especially in their early years of investing, see the stock market as a means to get rich quick. However, that’s a misguided notion. Nonetheless, that’s how so many people make their early mistakes, learn from those, and then go on to become successful investors.

Hindsight is 20/20. After a great run for the large technology stocks, everyone wants to invest or wish they had invested 10 or 20 years ago in the likes of Apple ( AAPL), Google (NASDAQ: GOOG) (NASDAQ: GOOGL), or Amazon ( AMZN). Since so many investors missed their extraordinary run, they probably want to find the next Apple or Amazon. Most folks want to know the stocks that would turn into multi-baggers (return hundreds of percent) and could make them rich rather quickly in years rather than decades.

For a moment, forget about technology stocks. Take the case of a more mundane company Home Depot (HD). It’s not even a tech, biotech, or some company that had the promise to change the world. It’s simply a run-of-the-mill retail chain of home improvement stores. However, its founders had the vision and skills on how to grow this company. Home Depot’s growth since the ’80s has been nothing less than spectacular. A $1,000 investment made in Home Depot in January 1986 would be worth more than $1.5 million today (dividends reinvested). But, again, how many people had the wisdom to recognize the scale of potential back then?

Another interesting but more recent example is of Ulta Beauty (ULTA). Again, it’s simply a retail company selling a wide variety of beauty products. Since its IPO in Oct. 2007, it has returned more than 17% in annualized returns compared to 7.50% of the S&P 500. An investment of $10,000 would have grown to about $80,000 compared to only $25,000 for the S&P 500. ULTA generated this outstanding growth despite of the 10% loss in its value this year due to pandemic impacts. We could go on with many more examples, but again, how many people can correctly identify such opportunities at the right time, early enough in their growth years? Not many.

It’s not realistically possible for most people to recognize the kind of multi-baggers described above in their nascent years, especially when they have little to none profit to show for. In addition, such stocks go through a lot of volatility in their early years, and it’s usually NOT a straight ride up. For example, Amazon stock lost more than 30% of its value multiple times during its extraordinary run in the last 20 years. In fact, it lost more than 90% of its value between 2000-2003 due to the fallout of the tech-bubble burst. So, even if you had the wisdom to buy Amazon stock in its early phase, chances are you would have bailed out long ago.

However, we strongly believe that you don’t need to have any such special abilities or be a stock wizard to earn solid gains from growth stocks. We will explain in a minute.

Invest in the Growth Strategies, Not the Growth Stocks

We take a different approach. We want to invest in growth strategies rather than simply growth stocks. What do we mean by growth strategies? Basically, these strategies do not chase after the popular growth stocks of today or buy-and-hold a few that would prove to be like the next Amazon, but they rely upon systematically and periodically finding growth stocks of tomorrow and continually updating the investment candidates as the conditions change. This method does not depend upon the investor’s ability to find just the right candidates, which in most cases does not work very well.

This article will explore the strategies and ways to capture the majority of growth in companies that are potentially going to be multi-baggers but avoiding the risks and volatility that come with such companies.

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To avoid the pitfalls that come with trying to pick super stocks, we think it’s much better and safer to invest in systematic growth strategies rather than growth stocks. We also will run some backtesting on one of our strategies to show the potential. Of course, with regard to backtesting results, it’s good to remember the adage “past performance is no guarantee of future returns.”

Benefits of Investing in Systematic Strategies

Investing in a well thought out strategy performs well and far better than having no strategy at all. Most investors are not tuned to making good decisions in a crisis or panic situation. This is where a pre-determined strategy helps and will stop you from making bad decisions. Investing in a strategy can help take the emotions out of trading decisions. With the help of backtesting, it’s possible to define the level of potential and risks with the strategy broadly. The investor is better able to assess the suitability and decide if the strategy fits well with their goals and risk tolerance.

In this article, we will lay out two strategies with an aim to capture a large part of gains from the fast-growing companies. The first one is one of our “rotation” strategies that we believe is suitable for retirees as well. We also include an income-oriented version of the same. The second strategy that we like to call the “multi-bagger” strategy is aimed at generating large returns; however, it comes with high risks as well.

  • A Simple Rotation Strategy for Retirees using Nasdaq 100 ETF or CEFs.
  • Multi-Bagger High Growth Strategy.

Strategy 1: A Rotation Strategy Using Nasdaq 100 Index ETFs or CEFs

This is a high growth strategy for moderately conservative investors, including retirees or near-retirees. This strategy may be a high growth strategy, but it has the in-built protection or hedging mechanism to conserve capital during corrections and recessions. This is not a strategy that is going to make you super-rich overnight, but over the long term, it has the potential to deliver exceptional results. Since this is a monthly rotation strategy, the risk is somewhat limited and likely 40% less than the S&P 500. Further, this is a simple strategy using just two securities, Invesco QQQ Trust ETF (QQQ) and iShares 20+ Year Treasury Bond ETF (TLT). Every month, we will check their three-month relative performance and invest in the security that performed better over the previous three-month period. Here’s the performance of this strategy in comparison with the S&P 500 (SPY) from January 2003 to September 2020.

Performance Charts:

As you would notice, the strategy not only outperforms the S&P 500, there’s a big difference in the drawdown (from the peak to bottom) and the worst year’s negative performance. Buying and holding the S&P 500 on Jan. 1, 2003, until Sep. 2020 would have provided an annualized return of 9.93%. Not too bad. However, you would have to tolerate the roller coaster ride of 2008/2009 with a drawdown of almost -51%. In contrast, using the above strategy, the annualized return would be roughly 15.0%. The maximum drawdown would only be -17.7% compared to -51% for S&P 500. In fact, the QQQ-TLT strategy ended the year 2008 with positive gains instead of a huge loss in the case of SPY. A similar trend could be seen during the 2020 pandemic induced correction.

Modify the Above Strategy to Generate Income:

If you need income on a consistent basis, instead of QQQ (which provides almost no income), you could choose one of the following technology-based CEFs.

Symbol

Fund Name

Dividend Yield

Dividend Frequency

QQQX

Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX)

6.38%

Quarterly

STK

Columbia Seligman Premium Technology Growth Fund (STK)

8.04%

Quarterly

BST

BlackRock Science and Technology (BST)

4.93%

Monthly

QYLD

Global X NASDAQ 100 Covered Call ETF (QYLD)

11.19%

Monthly

Out of the three CEFs and one ETF, only QQQX has a long enough history going back to January 2008, which incidentally covers the last recession.

This strategy using QQQX would have provided an annualized return of 14.07% since January 2008, compared to an 8.87% return from investing in SPY. The big difference again would be in the drawdowns. The strategy had a drawdown of only -20.6% compared to a drawdown of -51% in the case of SPY.

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Strategy 2: Multi-Bagger High-Growth Strategy

We will like to caution that this is a relatively high-risk strategy and may not be suitable for retirees or conservative investors. Unlike the first strategy (for retirees), this strategy does not employ any hedging mechanism, so we should expect high volatility similar to the Nasdaq index.

In stock market terminology, a stock is called multi-bagger if it doubles or triples (or even more) in a reasonably short span of time. That’s what everyone wants, right? However, the path to multi-baggers is filled with dangers and high risk. A company that may look highly promising today may have hidden and unforeseen risks and lose most of its value in the future. Especially since many such companies are small-cap (from $1 billion to $4 billion market cap) or even micro-cap (under $1 Billion market-cap), the risk profile of such companies is obviously much higher than a large-cap or mega-cap company. However, at the same time, a mega-cap company like Google or Apple is not likely to double or triple in a short span of time or even a decade simply because of their huge size and relative growth.

We will use our screening process to identify 15 companies that promise high growth in the short to medium term, if not longer. However, it’s entirely possible that a company that promises high growth and bright prospects today may unexpectedly run into difficulties (technology obsolescence, new competition, or losing favor with its major clients, etc.) and may lose its high-growth profile. For these reasons, we would want to run our screening process/methodology at regular intervals to make sure that the companies that we are invested in continue to hold the same (or similar) promise as when we first bought them. We may need to replace some old candidates with new companies at regular intervals (for example, on an annual basis). So, by no means, this should be considered a static buy-and-hold forever portfolio. So, for this portfolio, we will invest equal amounts in these 15 stocks and hold them for a year and then repeat the process.

Screening process:

We will select 15 companies that meet several high-growth criteria.

At this first stage, we want to keep companies of all sizes (market capitalization) on our radar, as long as they meet our other high-growth criteria. Once we have the final shortlist, we will select companies from different industry-segments and of varying market-caps.

  • Forward EPS (3-5 years) Growth Estimates > 10%

Most high-growth companies have one thing in common. We expect them to grow their earnings at a fast clip. In the long run, price follows the earnings. So, we will look for companies that have reasonably high future growth expectations for the next 3-5 years.

  • EPS Growth (3-year history) > 7%

Besides future growth estimates, we need to look at past growth, because after all, future growth estimates are just that, estimates. At this first stage, we will use a moderate 7% minimum growth in each of the last three years.

  • Revenue Growth (last 3 years) > 9%

We will filter companies that have grown their revenues in the recent past at a reasonably high rate, at least 9% or greater.

  • Revenue growth current year vs. previous year > 9%.
  • Price-performance (52 weeks) > 15% (This condition is waived for microcaps)

We also will use the price performance of the recent past as one of the criteria. However, we will not use this for the micro-cap stocks as they tend to be highly volatile.

  • Price-performance (13 weeks) > 8% (This condition is waived for microcaps)

After we apply the above six criteria, we get a list of 44 companies, out of which 27 are mega-caps or large-caps, nine mid and small caps, and the rest eight are micro-cap stocks. These are presented below in the order of “Total Weight,” calculated from the above six criteria:

Table for Mega and Large caps: (Data as of 10/16/2020)

Table for Mid-cap and Small-cap: (Data as of 10/16/2020)

Table for Micro-cap stocks: (Data as of 10/16/2020)

The Final List of 15 Stocks

We select the top 15 stocks from the above tables as below:

  • Mega-cap (> $200 billion): 2 stocks
  • Large-cap (from $10 billion to $200 billion): 10 stocks
  • Mid-cap/ Small-cap (from $1 billion to $4 billion): 2 stocks
  • Microcap (< $1 billion): 1 stock.
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Please note that this list should not be considered a static list but needs to be analyzed at regular intervals, at least on an annual or bi-annual basis. Also, one should invest equal amounts in at least ten stocks from many different industry segments to be able to diversify and avoid or contain large stock specific risks.

Conclusion

The majority of our work focuses on dividend-growth, high-income or hedging strategies for folks who are nearing retirement or already retired. Our portfolios and strategies are focused on how to generate income safely and are designed to contain risks and large drawdowns using “rotation” strategies.

However, if you are younger or even if you are in your 50s, there’s a place for growth stocks and growth strategies. Even for retirees or near retirees, depending upon the individual’s risk tolerance, it may be desirable to invest a small portion of their investment capital in a growth strategy. A growth strategy can do wonders to your portfolio and bring some zing to your overall returns. However, it will add to the risk as well. So, it is important to assess your risk tolerance carefully before you invest, especially in high-growth stocks or strategies.

To provide some answers and ideas, we discussed two distinct growth strategies, neither of them particularly depends on the investor’s ability to pick exceptional stocks. The first strategy included a version that could generate a regular stream of income while providing better growth than the S&P 500 in the long term.

It’s important for the individual investor to have realistic expectations and recognize that higher growth always comes with higher risk. That said, there are ways and means to limit the risks without compromising too much on growth. A booming or rising stock market like the one we have today always is interesting and alluring. It can certainly make fortunes. The current bull run is mostly carried by large technology and healthcare stocks. The market certainly looks overvalued. However, it’s hard to predict how far an already expensive market can go on to become even more expensive. That’s why it’s important to invest gradually over a period of time. It’s also very important to determine the right strategy that you would be able to live with during the good times and bad.



High Income DIY Portfolios: The primary goal of our “High Income DIY Portfolios” Marketplace service is high income with low risk and preservation of capital. It provides DIY investors with vital information and portfolio/asset allocation strategies to help create stable, long-term passive income with sustainable yields. We believe it’s appropriate for income-seeking investors including retirees or near-retirees. We provide ten portfolios: 3 buy-and-hold and 7 Rotational portfolios. This includes two High-Income portfolios, a DGI portfolio, a conservative strategy for 401K accounts, and a few High-Growth portfolios. For more details or a two-week free trial, please click here.

Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, UNH, CL, CLX, GIS, UL, NSRGY, PG, KHC, ADM, MO, PM, BUD, KO, PEP, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, VOD, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, ARCC, AWF, CHI, DNP, EVT, FFC, GOF, HCP, HQH, HTA, IIF, JPC, JPS, JRI, KYN, MAIN, NBB, NLY, NNN, O, OHI, PCI, PDI, PFF, RFI, RNP, STAG, STK, UTF, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. Any stock portfolio or strategy presented here is only for demonstration purposes.



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