Pendulum Swings to Growth

Terry Flanagan

After seven initial years of “lean”, from its inception in 2000, boutique institutional advisor Cupps Capital Management has weathered growth pain and now sees economic fundamentals shifting in favor of growth investing, its singular focus.

“The process of normalization has begun,” said the firm’s founder and investments chief Andrew Cupps. “It seems to be time for growth-style equities to lead the market in a fundamental shift, when we are going from a period of zero interest rates to non-zero.”

A huge cleansing of the markets in the post-tech-bubble and post-crash years has helped set the stage for “a classic reversion to the mean perspective.” Flows out of equities into bonds, from domestic stocks to foreign stocks, out of growth-style and into value-style investing and into alternative asset classes are now reverting, he stated.

Cupps said ramifications of this economic view include a bolstering of the U.S. dollar, which would undercut commodities priced in dollars, and a signaling of the U.S. entering a ‘strong-enough’ period to have positive interest rates. “Go-to regions like India and China will falter in their growth.”

“This feels a lot like the decade of the 1990s, when the U.S. was the place to be,” when innovations, good rules of law, and great management teams domestically found the rest of the world lacking. During that time, the U.S. dominated the internet, medical breakthroughs, and other high-value concepts, exporting these important resources to the rest of the world, he noted.

Factors that would support a ‘Goldilocks’ scenario ahead include “enough growth to exit zero interest rates and not enough to make ordinary companies interesting just because they are selling more widgets. If companies do “it” – whatever they are supposed to – better than their competition, they’ll grow more. Investors want that,” he said.

Cupps is a buyer of companies that some investors view as overpriced. “They don’t understand how differentiating and powerful the earnings potential is” beyond already-high P/E ratios, the CIO stated. Green Mountain Coffee and Tesla have exhibited such factors, and Cupps cited Intuitive Surgical as one of the longest-held positions in the portfolio.

With $1.4 billion of assets under management in five strictly-growth strategies, Cupps says a multi-disciplined investment process and a comprehensive platform are used to evaluate appreciation potential.

Starting with valuation, the five-prong systematic approach gauges technical behavior, thematic timeline, quality of business, and confidence in management seen by Cupps and the firm’s four researchers.

This five-perspective scoring methodology utilized by the investment team individually and holistically defines attractiveness. The algorithm weights each sub-score to produce the final view, and assesses how it relates to other holdings and candidate stocks.

Cupps said the Comprehensive Equity Portfolio Platform code embodies his 20-year investment collaboration focused on rapidly-growing companies. “CEPP is a process as well as technology and tools; it’s for accounting, trade order management, and more generically to reflect what we do and how we believe growth stocks behave in the market.”

Of the $1.4 billion of assets Cupps manages, $1.1 billion is in the 13-year old flagship Cupps Small Cap Growth Composite, which returned 17% in the second quarter.

The firm began with a handful of institutional client separate accounts in the firm’s flagship small cap growth strategy from 2000 to 2007; it launched a mid-cap strategy in 2005, an all-cap growth in 2007, and in 2010, the large-cap and concentrated growth strategies.

The year 2012 brought $250 million of new assets to Cupps Capital and another $150 million has been added through July 2013.

The platform provides a framework around the single focus of growth investing in order to “do it better in all periods in the future,” Cupps added.

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