Strategies of Enhanced Investments

Introduction to the Rising Stars strategy

Launched: 07/13/2020
Actualized: 07/14/2021
Our Rising Stars strategy was created to find the next high-growth stocks like Facebook, Zoom, or Alibaba before the market does. Our platform searches for stocks with low entry prices, exponential growth rates, and the potential to disrupt their industries in the future.
Our Rising Stars strategy was created to find the next high-growth stocks like Facebook, Zoom, or Alibaba before the market does. Our platform searches for stocks with low entry prices, exponential growth rates, and the potential to disrupt their industries in the future.
The strategy automatically finds middle-cap companies (often undercovered) with rapidly growing revenues, prioritizing companies with close reporting date. The Top-5 companies with the highest revenue growth rate are selected (in the last quarter and on average over the last 3 years) for investments.

We launched Rising Stars on July 13, 2020 and it gave +45.4% for the end of the 1st year. Recently, the Rising Stars portfolio has experienced a slight drop, amid the rhetoric of the official China. Nevertheless, the strategy still looks cool, gives good results (+55.7% since inception versus S&P500 returns +38.4% for the same period), which is also confirmed by the backtest. One of five our portfolio picks even increased by +327.8% in that time.

Prerequisites: investigation of booming growth

Our initial analysis showed that steady revenue growth did have a significant influence on share price performance.

Our baseline assumption (confirmed by the analysis) was that growth companies are autocorrelated: fast-growing companies, on average, continue to grow rapidly, and slow-growing companies continue to grow slowly. We also assumed (and confirmed) that the growth rates shown in the last period are especially important (since often growth companies "cease to be growth companies").
Growth is almost the only metric that tech companies need to focus on
Another assumption (which also found confirmation) was that the companies with the fastest historical growth trajectories in financial performance, on average, show capitalization growth much higher than the rest of the companies.
Finally, we assumed (which also found confirmation) that if we add a limitation on the maximum EV/Sales multiplier (to control risks and avoid the situation of entering "overheated companies"), this will not worsen, but, on the contrary, will slightly improve the performance of the strategy.

Growth is the most important metric that venture capital funds look at; for example, some partners at Y Combinator (the world’s most successful venture capital accelerator) say growth is almost the only metric that tech companies need to focus on.
We mention venture capitalism specifically for one reason — in recent 10 years performance of VC funds are 3x-3.5x versus the best fund managers. This why, we do believe that we should import some ideas of VC's approaches in our strategy.

Moreover, companies with ultra-fast growth rates of financial indicators does not focus on profit (or EBITDA) when measuring the success: they are measured by revenue. Such companies may be unprofitable at the moment (due to financing of growth) — the market expects that they will start earning profits sometime in the future.

Summarizing our ideas, we based our methodology on four assumptions:
1
Growth companies follow trends: the companies growing fast tend to grow fast; companies growing slowly tend to grow slowly.
2
Recent revenue growth is one of the most important factors when predicting future growth.
3
Companies with the most rapid historical revenue growth generally have much better share price performance compared to others in their industries.
4
High-growth companies may not always report profits in their early stages making strict revenue measuring inaccurate.

Approach: selection of burgeoning and cheap companies

For our analysis, we selected stocks with a market cap over $ 500 million that were either members of the S&P500 or NASDAQ composite indices. We found the average quarterly share price performance of these stocks was roughly 1.7%.

We then found that in instances where the average of the last and historical quarterly revenue growth of the selected companies was greater than 20%, we could predict future growth. On average, quarterly share price performance in the following quarter increased to 3.0% (72% higher!).
If we modified the test to include only stocks where the average historical revenue growth was greater than 30% and most recently reported revenue growth was less than 20%, then average quarterly share price performance increased to 5.4%.

Finally, we found if we further only selected stocks with EV/Sales multiple of less than 5x, results improved from 5.4% to 5.9%. This helped us avoid "overheated stocks" with too high an entry price.

When we ran a logistic regression on the EV/Sales multiple, all the considered factors (i.e. revenue growth rates, EBITDA margin, company location, and company sector) had positive regression influence on the overall EV/Sales multiple. Still, the highest influence, as expected, was from last and average historical revenue growth.

To reach mentioned above conclusions, our platform conducted extensive data analysis on roughly 2,000 companies from 2015 to 2021 and tested the influence of various factors on share price performance.
Among more the companies constantly scanned, the system selects companies with the most rapid growth trajectories in financial performance, while trading below the average multiple. We prioritize companies reporting within the next 3 days to get maximum effect from potentially positive reports.

After finding an interesting company, our analytical team we performs thorough analysis, brain storming every idea with team, filtering one-off and side effects for company's economics and publish an analytical note.

Backtesting: 2.76x annualized higher returns versus S&P500

The object for the back-test of the strategy was an equal investment in 5 companies with the highest average revenue growth over the last 3 years, the last revenue growth>20% and an EV/Sales multiple <6x. Rising Stars has shown great results on the back-test, substantially out-performing major indices.
Rising Stars back-test vs. the S&P 500

Backtesting was performed since 01/01/2015 till today. Maximum drawdown could be occurred on 05/13/2021 as -49.8%. In the table below, you can observe strategy’s backtesting returns by year.
Here is the distribution in which companies the system would invest in each period.

This plot map shows us which companies could be included in portfolio accordingly to Rising Stars strategy approach.
Portfolio dynamics structure

Actual Performance

We launched the strategy on July 13, 2020, and it showed excellent results: the overall result is +55.7% since launch versus S&P500 +38.4% returns for the same period. One out of 5 companies in the portfolio grew by tremendous 327.8%.
Динамика акций eXp World Holdings Inc

Now Rising Stars showed a slight slowdown in return +7% this year 2021 versus S&P500 return as +16.5%, amid the rhetoric of the official China. Chinese companies fell heavily on news that the Chinese authorities are taking new regulatory measures to improve data safety, regulate listing abroad. Even so, the RS strategy performs great as shown below.
Rising Stars vs. S&P 500

Maximum drawdown was occurred on 05/12/2021 as -46.6%.

Now the strategy has Sharpe ratio as 1.20. It is used to help investors understand the return of an investment compared to its risk. Sharpe Ratios above 1.00 are generally considered "good", as this would suggest that the portfolio is offering excess returns relative to its volatility.

Example deals


  • Cloud-based real estate platform actively growing every quarter (Q1 2020 year-over-year growth of +73%, and last quarters average of 145%)
  • Valued at EV/Sales 1.0x, which seems low for a profitable company at this growth rate

  • China’s booming (+113%) digital platform in pharmaceutical distribution with low multiples score (P/S 0.5x)
  • Grows 100% year over year every quarter and retains high growth potential to become market leader in pharmaceutical distribution
  • The company is still loss-making but is improving unit-economics and has already shown positive operating cash flow at the end of Q3. At the same time, it is valued at only 0.5x P/S

  • Radius Health has leading market share in osteoporosis (bone disease) drugs and it also has advanced developments in oncology
  • Historically has a good revenue growth rate, averaging 98% year-over-year while being valued at 3.2x EV/Sales
  • Company has significant potential due to expected launch of new drugs in 2021 (3 drug titles are already in phase 3 clinical trials)
As of 06/22/2021

Summary

Rising Stars incepted on 2020−07−13;
More than 2,000 companies from 2015 to 2021 are tested for the influence of various factors on share price performance with our platform;
Outperfoming S&P500 — actual performance of Rising Stars strategy is +55.7% vs. 38.4% returns from S&P500;
Sharpe ratio is 1.20;
With the growth of inflation, rates, influence of regulators, the strategy showed a drawdown from the highs like all fast-growing companies strategies, but still in great profit from the launch and from the beginning of the year (unlike funds investing in fast-growing companies).