Actual Growth Stocks

Why not select and weight stocks in a growth portfolio using only firm growth fundamentals rather than variables that depend on stock price? In their July 2025 paper entitled “Fundamental Growth”, Robert Arnott, Chris Brightman, Campbell Harvey, Que Nguyen and Omid Shakernia investigate performance of stocks exhibiting growth in fundamentals such as sales, gross profit and research and development (R&D) spending rather than price-based measures such as valuation ratios and market capitalization. Specifically, at the end of each March, they:

• For each stock in a sample comprising the top 98% of U.S. stock market capitalizations and each fundamental, calculate both per-share growth rate and change in dollar value over the last five years.
• For each stock, compute a composite:
  • Per-share growth rate as the average of z-scores for the three individual growth rates divided by sales.
  • Change in dollar value as the average for the three individual changes in dollar value, each scaled by the respective total for all stocks.
• Select the 1,000 firms with the strongest composite per-share growth rates.
• Reform portfolios of these 1,000 stocks weighted by composite change in dollar values, with zero weight for negative values (FG 1000).

As benchmarks, they use: (1) annually rebalanced top 1,000 U.S. stocks ranked by market capitalization (CW 1000); (2) a traditional capitalization-weighted growth-style portfolio reformed similarly to the Russell growth methodology (CW Growth). Using annual U.S. stock/firm fundamentals data and stock prices during March 1969 through December 2024, they find that: (more…)