There are two sophisticated strategies to unearth growth stocks in small and medium-sized enterprises!

Small and medium-sized enterprises also have growth stocks.

Do you pay more attention to large caps and ignore the investment potential of small and medium-sized enterprises? In fact, small and medium-sized enterprises also have rich opportunities in growth stocks, which is the focus of James L. Callinan, a fund manager who specializes in this type of investment.

Callinan is a famous American growth fund manager who graduated from Harvard University with a bachelor's degree and from New York University and Harvard Business School with a master's degree. He has managed emerging growth funds at various investment companies such as Putnam and RS for many years, and has also established his own asset management company. He is currently the Chief Investment Officer of Osterweis Capital Management's emerging growth strategy.

In terms of performance, he has been awarded the best manager of the year by Morningstar in 1999 due to the excellent performance of the funds he managed. Compared with the Russell 2000 Growth Index, the emerging opportunity funds he is currently managing also have good performance levels in annualized returns in various cycles. The founder of a wealth management company once said that he usually does not invest in funds with assets under management less than $100 million, but he made an exception for Callinan's fund.

Based on this background, perhaps some of his views and strategies in the emerging growth field will give us inspiration. Let's take a look together below.

What does Callinan focus on for growth stocks?

Callinan and his team have always been focused on investing, hoping to invest only in the best ideas. They look for small and medium-sized growth companies (usually with a market value between $50 million and $2 billion) in those emerging industries or segments that focus on meeting specific needs, searching for those that have not yet been discovered (or are still skeptical by the market).

In emerging industries, the market evolves rapidly, and some fundamental changes or innovations can bring opportunities to investors. The earlier the advantages and potential of these small companies can be identified when they are still small companies, the more benefits can be gained from their rapid growth.

What conditions do such companies need to meet?

The first and fourth points can get more inspiration from qualitative analysis of the industry and company, which can be found in the Futubull app. The second and third points can be measured by quantitative indicators, such as the proportion of market share to see the company's position in the industry, and the growth rate of net income to see profitability and growth, all of which can be found in the Futubull app.When looking for growth stocks, it is important to first consider the industry. According to master Phillip Fisher, there are two key tools to consider.

Of course, risk control is also very important. Carinna and her team focus on valuation and use a maximum P/E of 30 as a reference value when buying. However, there can be other valuation standards, such as other methods."How to Identify High-Quality Large-Cap Growth Stocks? How to Determine Valuation and Seize Opportunities?"PEG is suitable for valuation of growth companies.

Refine the strategy with growth anchors and valuation pruning!

Callinan and his team have two refined strategies that consider both growth and risk, which are quite inspiring.

1. On the one hand, they will focus on growth anchors, which are achievable growth targets.

For example, when investing in a company, the company's users are less than 0.1 million, but the CEO's plan is 30 million. Considering the information such as the lack of apparent competition in the industry where the company is located, Callinan believes that this target is achievable. Therefore, using this growth as the anchor point, looking at the current price, he thinks it is reasonable.

For another example, the management of a certain company wrote in a statement that they believe they can sell 4,000 small components within 3-5 years. Based on the financial analysis of the company, Callinan and his team believe that this is an achievable goal, which can be used as an anchor point, and then evaluate how much theoretical upward space there is through earnings per share.

2. On the other hand, they will do some valuation pruning, which is used in conjunction with the previous strategy.

In other words, when the potential of the anchor is fully realized (or looks impossible to achieve) and the valuation begins to become overvalued (or volatile), sell some of the positions. This way, there will be more cash available to buy again when the stock price falls to an attractive level. This converts the volatility of the stock price into an opportunity.

3. Idea extension

Karina's strategy combines growth and valuation, which is somewhat consistent with the formula below:

It can be understood that the rise in stock prices mainly comes from two aspects. One is the growth of PE (representing the growth of valuation), and the other is the growth of EPS (representing the growth of profitability). With this formula, we can better determine the reasons for the rise in stock prices and predict the situation in which stock prices rise, thereby helping to make decisions on individual stock selection and timing.

The natural coexistence of profit growth and valuation increase is good, but the increase in valuation may not come from profit growth, so we need to look at the specific factors behind the rise in stock prices (such as mainly profit growth or valuation increase).

When profit growth is not significant, there may be risks in the valuation that rises too much, so it is necessary to consider whether valuation pruning is needed.

Regarding the part of profit growth, what kind of situation is more likely to bring long-term upward movement of stock prices? A company that is expected to have stable growth in the future may be more convincing than a company that has had extreme growth in the past. This is somewhat similar to Karina's growth anchor.

Well, that's all for today. Do you have anything to share about the refined strategy of small and medium-sized growth stocks?