The share price action of companies whose prospects are highly sensitive to economic activity is also very revealing: Brunswick, a manufacturer of leisure boats, has seen its stock move up more than 50 per cent over the last six months and car dealer Lithia Motors’ share price has gone from around $24 to $38 over a similar period.
Big moves in stocks in these sectors usually occur at the beginning of bull markets, so there are grounds for optimism.
If, however, the current Wall Street rally peters out as political wrangling undermines investor confidence, we believe there will still be ample scope for investors to make money in US stocks by taking a bottom-up stockpicking approach.
The Russell 3000 index, which represents approximately 98 per cent of the investable US equity market, features so many fast-growing and innovative younger companies, the challenge for investors is often how to select those with the best long-term prospects.
My approach to stockpicking starts with a company’s sales growth potential and uses computer screening techniques to find those with records of 15 per cent or more consistent revenue gains over the last three years.
It is not uncommon for such screens to reveal hundreds of potential candidates based on this approach – something that is testament to just how well populated the US is in terms of exciting investment opportunities.
We then refine our search using criteria such as evidence of expanding margins, low debt levels, management ownership, reasonable valuations and constructive technical action of the share price.
At this point we are in a position to start digging into the fundamentals of the companies to try to assess the power of their franchises.
We look at how crucial their products and services are to their customers, how easily competitors could copy what they are doing, how big the market opportunity may be and whether there is pricing power.
Younger companies with winning formulas usually have strong growth potential given America’s vast and growing population.
American Public Education, a provider of post-secondary education with an emphasis on military and public services, is an example of an investable candidate from a recent screen.
The shares are out of favour because of concerns about cuts to military courses, yet the company has grown sales at over 30 per cent a year between 2006 and 2011.
It has invested heavily in new courses for Wal-Mart employees, a potentially significant new growth opportunity for the company.
With no debt, an impressive return-on-equity (ROE) of over 30 per cent and undemanding price/earnings (P/E) ratio of around 16 times, American Public shows what investors can find if they look beyond the mainstream US indices such as the S&P 500.
The screening process has also helped us find companies that can still thrive in difficult economic conditions.
Despite the severity of the 2008 to 2009 downturn, it identified Concur Technologies, which helps businesses save money on their travel budgets, as a company that was still able to achieve 15 per cent sales growth in 2009 – following 67 per cent growth in 2008 – and then grow revenues at an even faster rate since then.
Subsequent research has revealed that the company sells its software on a subscription basis and customers generally avoid cancelling contracts because of the money they save using the product.
As such, we believe the US equity market has a lot to offer investors at present. If the current economic backdrop turns out to be a "mirage" investors are likely to try to find companies that can still grow their revenues at a decent clip in more challenging circumstances and there are plenty of these in the Russell 3000 universe.
If the Republicans and Democrats can work together to resolve the debt ceiling and fiscal cliff issues, the economic recovery could gain momentum and drive cyclical stocks such as Brunswick and Lithia Motors considerably higher.
Nick Ford is head of US equities at Miton. The views expressed here are his own.