Investing is a balancing act. Literally. As a growth investor, not only do I need to own the best stocks, but I must also own the right mix of stocks to limit my risk and maximize my profits.
Personally, I follow the 60%/30%/10% rule. This means that 60% of my portfolio is allocated to conservative stocks, 30% to moderately aggressive stocks and 10% to aggressive stocks. This way my portfolio is the perfect mix of stocks that will protect and grow my wealth while also giving me the exposure to the kind of home run stocks that will increase my returns. The proportions I’d recommend for you depend on your personal risk tolerance and goals, which is why, at Platinum Growth Club, I provide an Allocation Tool for our Model Portfolio.
The other part of limiting risk and maximizing profits is “equal weighting” my stocks. Many investors fall into the trap of having too much exposure to one stock. When you have a big winner, it can easily dominate your holdings. While I fully believe in letting your winners run, you have to do it safely. My rule of thumb is to never let a single company represent more than 10% of your portfolio.
Exchange-traded funds (ETFs) allocate a bit differently. An ETF is a bucket of stocks that can track the major indices, a particular sector or even gold and commodities. Most of them follow a quantitative strategy, but unlike my Model Portfolio, few of them are actively managed by a human being. For example, most ETFs are “capitalization weighted.” So, the higher the stock’s market cap, the more heavily weighted.
Traditional vs. Smart Beta ETFs
Consider the SPDR S&P 500 ETF (SPY), a traditional ETF that tracks the S&P 500. Out of its Top 10 holdings, Microsoft (MSFT) sits at number one, with a $1.39 trillion market cap and a 5.52% weighting. JPMorgan Chase (JPM) is the 10th holding, with a $332 billion market cap and a 1.20% weighting. As the S&P 500 buys and sells stocks and weightings shift, the SPY has to rebalance and make those changes, too. After all, it is tracking the index.
However, smart beta ETFs take another realignment approach. These ETFs are filled with high-quality stocks with strong fundamentals, sales and growth that can outperform the market.
So, when a smart beta ETF rebalances, it’s not solely about the weighting of the stock. The quality is just as important. It kicks out stocks that are weakening and replaces them with more fundamentally superior stocks. Smart beta ETFs typically rebalance every 90 days, which means that the next big rebalance will come in the next few weeks.
And I couldn’t be more excited.
As you know, I only invest in fundamentally superior companies. So they tend to see a significant increase in institutional buying pressure during the smart beta ETF realignment period, which in turn drives the companies’ stock higher.
Case in point: Repligen Corporation (RGEN). The stock is currently held in 76 smart beta ETFs, and is also one of the Top 10 holdings in the iShares Russell 2000 ETF (IWM), which tracks small-cap stocks.
Now, here’s how we know RGEN is fundamentally superior: For its first quarter of 2020, the company posted record results. Revenue jumped 25% year-over-year to $76.1 million, up from $60.6 million in the first quarter of 2019. Analysts were expecting revenue of $71.19 million.
First-quarter operating income rose to $11.9 million, compared to $11.2 million in the same quarter a year ago. Adjusted operating income climbed 18% year-over-year to $18.3 million. Repligen also reported adjusted earnings of $0.32 per share, or 23% annual earnings growth. Analysts were looking for earnings of $0.21 per share, so Repligen posted a stunning 52.4% earnings surprise.
Looking ahead to fiscal year 2020, Repligen reiterated its previous outlook. Despite the economic downturn, the company still expects to achieve total revenue between $309 million and $319 million, or 14% to 18% annual revenue growth. Adjusted earnings per share are forecasts to be between $1.09 and $1.14, which is up from previous guidance for earnings per share of $1.07 to $1.12.
For smart beta ETFs looking for a high-quality stock, RGEN fits the bill to a “T.”
I added RGEN to my exclusive Platinum Growth Club Model Portfolio in July 2019, and it’s up almost 50% since then. And given its strong fundamentals and exposure to institutional buyers, I see significant upside ahead.
Tomorrow, I will be sharing my latest thoughts on Repligen in my June Monthly Issue of Breakthrough Stocks, as well as releasing my newest Breakthrough Stocks recommendation. All Platinum Growth Club members will receive the issue, as well as my weekly updates for Growth Investor and the Platinum Growth Club.
If you’re interested, go here to see more and give us a try. Once you do, you’ll have access to all my newsletters, reports, Buy Lists, the exclusive Model Portfolio and Allocation Tool. As I alluded to earlier, my handy Allocation Tool will show you how to blend the stocks in the Model Portfolio – right down to the number of shares you ought to own. As any institutional investor like the ETF companies can tell you, allocation is very important to maintaining a successful portfolio, and this Allocation Tool can help you do just that.