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  • GROW Funds

Q4 2022 - Investor Letter

January 19th, 2023

Dear Clients,

Happy New Year! We are glad to have 2022 behind us. Markets were under intense pressure during 2022 as they were discounting (and rediscounting) rising inflation due to past, overly dovish monetary policy as well as aggressive government spending. In response to increasing inflation, the federal reserve board raised interest rates seven times from 0.25% to 4.5%. As rates increase, future cash flows are discounted at a higher rate causing present valuations to come down. Add geopolitical tension in Ukraine, Russia, China, Taiwan, North Korea, Iran etc., and it didn’t make a very good backdrop for stocks.

The FAANG+M stocks didn’t fare well with Facebook (now META) down 64%, AAPL down 27%, Amazon down 50%, Netflix down 51%, Google down 39%, Microsoft down 29% and Bitcoin down 65%. 2022 was also the worst year ever for US Bonds (see link). While we did not have exposure to any of the aforementioned assets in our portfolios, we were nevertheless impacted by the macroeconomic environment. Our portfolios were down 18% to 22% (see below). Market observers are now concerned about the Fed potentially overtightening and tipping the economy into recession with a resulting earnings slowdown.

We continue to believe that the business fundamentals of the companies we own are improving and our longer-term theses are intact. In addition, we believe that the current environment provides an opportunity for stock selection and active management versus investing in indexes that are heavily weighted towards the companies mentioned above.

Over the long term, stocks follow revenue and earnings growth, which is what we focus on. The chart above shows price to earnings ratios for mega-cap (Google, Amazon, Apple, Meta etc.), large-cap, mid-cap, and small-cap stocks. When comparing mega-cap to small-cap (the purple and green lines) you will see that the mega-caps are trading at 23x earnings and small-caps are trading at 14x.

For these reasons, we believe that the mega cap companies still have room to re-rate lower and are not likely to be leaders in the next bull market.

FAANG+M De-Rating

In fact, we are as confident as ever in our small cap thesis. Last year, we wrote an article highlighting small-cap outperformance cycles since 1926 which can be found here. Since then, Bank of America Merrill Lynch, RBC, Jefferies, and Wells Fargo have all made similar forecasts. The table below shows the small cap cycles and their associated returns. We believe that when the dust settles, an outperformance period will commence; if it hasn’t started already. Since the end of June 2022 through year end, GROW’s Aggressive Growth, Growth, and Growth and Income portfolios are up 18.6%, 20.5%, and 15.1%, respectively compared to the NASDAQ (-5.1%), the S&P 500 (1.4%), and the Dow (7.7%).

Small-Cap Outperformance Post-Inflation

By continuously screening for companies with new products and services, large market opportunities and high revenue growth with strong margins, we believe your portfolios are well positioned. While we are cautiously monitoring macroeconomic events, our time is best spent looking for new ideas and re-evaluating your portfolios despite the noise.


Our confidence in the ultimate outcomes of our holdings makes us hesitant to abandon stocks in our portfolios. We wrote an article about consolidation earlier in the year. While the stock market may not always accurately reflect the value of products and services that companies provide, other companies will through acquisitions. In the third quarter, CyberOptics (CYBE) was acquired for a 30% premium. In the fourth quarter, Apollo Endosurgery (APEN) was acquired by Boston Scientific for a 67% premium. In total, we had five companies acquired during 2022 and we believe there are other companies in your portfolios that could have similar outcomes.

During times like these, we have found some of our best performing stocks. We are off to a good start in 2023 and while past performance is no guarantee of future results and the timelines are uncertain, our decades of experience and process give us confidence.


This quarter, we would like to highlight Silk Road Medical Inc (SILK).

SILK develops and manufactures medical devices to treat carotid artery disease which is one of the leading causes of stroke in the world today. SILK has a unique approach called trans-carotid artery revascularization (TCAR) which is a minimally invasive procedure to treat carotid artery disease. Currently, doctors only treat the highest risk patients because of the high risks of the traditional legacy procedures. The TCAR method is a faster procedure and allows a shorter length of stay in the hospital. They recently received FDA approval to treat all severities of the disease, allowing doctors to treat more at-risk patients than only the most severe cases. They have yet to expand internationally, which represents an even larger opportunity than the $2.6B U.S. market that they are currently focused on. Ultimately, we believe it is likely for SILK to be acquired by a larger medical technology company as TCAR becomes the standard of care for treating carotid artery disease.


We thank you for your continued trust and support. We encourage any questions or comments you may have. As always, we are available for portfolio reviews anytime. Please contact us if you are interested in learning more about the stocks you own.


The GROW Funds Team



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