Tuesday, October 23, 2007

Info Tech, Growth Investing, and the Crowded Trade

“…every monetary tightening cycle has almost always produced a financial or economic crisis, which in turn has marked the beginning of a new reflation cycle.”

Bank Credit Analyst
Strategy Outlook Part 1 – Fourth Quarter 2007, September 14, 2007

The reflation cycle is well underway. The Debt Supercycle (see report October 15, 2007) underpins the perpetual rise in assets, rolling from one to the next, producing bubble after bubble only to have the bursting bubble be resolved with more liquidity. And so the story goes.

Accompanying the Debt Supercycle is the tendency of sectors to get overowned producing a crowded trade. And an opportunity for keen-eyed investors to exploit.

I made this point several times before but it bears noting again, particularly in light of the very solid earnings news eminating out of one of my favored areas – Info Tech: Growth investors need to find growth issues to own. One of their favored areas, Financials, is now toxic. Yet, the money allocated to growth not only remains but is actually increasing as investors shift money from value to growth plays. So, what do growth money managers do when one area goes from favored to toxic? They find another area to overown. Enter Info Tech.

Investment Strategy Implications

With an end of year rally setting up nicely, the momentum lemmings are poised to act like Santa’s little helpers and get busy, busy, busy driving prices higher once we get the spookiness that is October out of the way and 2007 comes to a close. In the process, Info Tech (and Industrials) should remain very solidly in the upper quartile of performers.

Amidst the joy, however, there is one style area that certain investors still remain confused with – The Smids

Yes, large cap and specifically large cap growth appears to be the better place to invest. However, converting an underperforming Smid group into a negative return group is a mistake and runs the risk of leaving lots of money in selected areas on the table.

For reasons stated previously (including what is noted above), excess liquidity, decent earnings growth, reasonable valuation levels, and the pressure to perform will continue to help drive prices higher in the Smids. Therefore, don’t overlook the opportunities that may be buried in the Smids, particularly in the Info Tech and Industrials sectors.

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