With the earnings season approaching we welcome you to the first company reporting update of the new (third) quarter. First to appear are financial statements of companies with fiscal years ended July and fiscal quarters ended August. Financial statements of the larger volume of companies with fiscal quarters ended September will appear in the last week of October and the first week of November.
Q3 2020 hedge fund letters, conferences and more
Remember the results from the June quarter-ending financial statements. The technology sector’s average sales growth rate was more than 3x rate of non-tech companies. Also, only 1/3 of companies (but an incredible 66% of market capital) recorded an improvement in sales growth. Improvement in sales growth was and still is concentrated among the largest tech companies and Amazon (NASDAQ:AMZN) which has become such a large proportion of the sector that this one single company accounts for much of the sector or index improvement.
For now, buy and sell research reports are returned to neutral as we anticipate a unique quarterly update in the coming weeks. Based on last quarter’s financial statements we see no evidence of any growth leadership shift away from the technology sector. This is a good time to review index growth potential by focusing on companies that have top-line strength with increasing sales growth and stable gross margins.
Otos Total NASDAQ Index
The share price index of the Otos Total NASDAQ Index has advanced by 132% relative to the Otos Total Market Index since the March, 2013 low. Current relative price-to-sales is at the lower-end of the range in the record of the Index.
Last week the share price index of the Otos Total NASDAQ Index advanced by 2.9% compared to a 0.7% decline for the Otos Total Market Index. Gaining stocks in the Otos Total NASDAQ Index numbered 165 or 22.4% of the Index total compared to a 10.3% gaining stocks frequency across the 3979 stocks in the Otos U.S. stocks universe.
We have collected second quarter 2020 sales data for 724 of the 736 comparable record companies in the Otos Total NASDAQ Index representing 100% of the capital value. The Index capital weighted average sales growth rate is 12.2%. The proportion of Index market capital accounted for by rising sales growth companies is down to 55.0% as compared to 68.2% last quarter.
Currently, sales growth is low in the record of the Otos Total NASDAQ Index but higher than last quarter.
The proportion of total market capital accounted for by rising gross profit margin companies is down to 32.4% compared to 61.3% last quarter.
The Index is recording a falling gross margin. Inventories are down, improving the chance of a future increase in the gross margin. Sales, General and Administrative (SG&A) expenses are high in the record of the Index and falling.
Poor-Quality Growth Trend
That implies that the Index has further capability to accelerate EBITDA relative to sales with lower costs. SG&A expenses are falling at a more rapid rate than the gross margin thereby producing a rising EBITDA Profit Margin. This is a growth trend but of very poor-quality since lower costs can insulate the bottom line from top-line weakness for only a short time. Interest costs are high in the record of the Index and falling. That implies that the Index has further capability to accelerate earnings relative to sales with lower financing costs. Lower interest costs also diminish financial risk and are often associated with higher share valuation.
Choose to invest wisely among stocks of companies that have cash (Green Leaves), solid fundamentals (Healthy Tree Trunk) and financial stability (Stable Pot).
The more stable the pot appears, the better the attributes. Green and gold are good. Red is bad and the more intense the red the more urgent the call to action.
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