Categorising Stock Market

Recently I've been looking into the different movements in the stock market which kind of have several dimension of categorisation in the stock market. Also we often hear people describing stocks as growth, value, speculative,  tech, finance, healthcare etc.

So I want to help myself understand better on categorising the stock market and be more aware of how the stock market moves in terms of sector rotation and money flow.

Categorisation

So to start with categorisation, this is actually not related to sector or industry. This is how people group them in terms of several similar characteristics. And different people group them differently. We often hear a list of different categorisation such as:

• Growth
• Value
• Speculative
• Dividend
• Blue Chip
• Income
• Cyclical

This list can go on depending on how each individual characterise and group them and this often creates a confusing understanding for each stock. Sometimes you hear people say the same stock is in multiple categorisation which makes it kind of messy to differentiate them.

So to simplify it for my easier understanding and interpreting the market, I'll put them into 3 major basket.

1. Speculative
2. Growth
3. Value

I group it this way mainly because this is often how the money will flow in terms of different rotation and seasonality.

So let's further elaborate how we determine this 3 categorisation. I'll do that with some illustration example of a company going through these various phases.

Speculative

So a brand new company started with a wonderful idea, it started some good progress and showing people some early results. Followed by giving some good projection and vision that how good they are and what else they want to achieve in the upcoming years. But more than often such new company hasn't been showing consistent profits as they are trying to expand and grow in a very rapid way. They are still trying hard to prove themselves. These companies are in the Speculative phase.

Some reference to these type of companies are those in the emerging market. Simple reference is to look at all the ARK holdings because ARK is trying to find companies they think will be successful in the future and most of them have not proven themselves today and also not showing consistent profits yet.

From here, it can go 2 ways, Growth or Disappoint.

Disappoint

Few years down the road, this company did not achieve what it said and hasn't been showing people that it's profiting. Time could tell if a company is really showing results or just all talks but nothing came true. This is when such company goes into Disappoint phase. Where their results get disappointing and investors will start to take their money away from such companies.

Growth

If the company did not disappoint, another phase it will be in will be Growth. This is when a company is achieving its target year over year and showing people that it's starting to make profits. Whatever they said and target are coming true year over year. This is when a Speculative company slowly turns into a Growth company and continues to consistently show progressive growth year over year.

A company stays in the Growth phase as long as they continue to grow more than the average companies. This often require the company to continue innovating and proving their innovation turns into reality while continuing to deliver promising results year over year.

I made a Finviz screener that helps to filter all those companies that has been growing on all the growth related fundamentals - Finviz Screener for Growth Stocks. This is just a quick way to screen and categorise, may not be 100% perfect but it's good enough.

Also characteristically, they are more often in the Technology (XLK), Consumer Cyclical (XLY) and Communication (XLC) sectors as these sector has more larger room for continuous innovation.

Value

So not all company will stay in the Growth phase because certain industry simply doesn't grow that fast due to the nature of their industry. One example may be the consumer staples where these are usually daily necessity where there are not much room for innovation. But during their Growth phase, they have built a strong moat to keep them in a decent competitive advantage to continue to provide a firm but smaller growth year over year.

There are various value ETF that tracks this, one of them I look at is Vanguard Value ETF (VTV). Which from a sector perspective, Value companies are often Finance (XLF), Industrial (XLI), Consumer Defensive (XLP) and Healthcare (XLV).

Obsolete

Not all companies can maintain competitive in the market. In this competitive market, if a company does not continue to grow themselves and adapt to new innovations. They will face obsoletion at some point in time. This is where the company start to show that they are not profiting years over years and will eventually exit their business.

There's an additional interesting characteristics to this phase as well. Is that some companies going into the obsolete phase, also end up moving towards the Speculative phase. This is because of various factors that creates potential hope towards that company's revival. When such 'hope' exist, it's also similar to people hoping a new company will do well in the future. Just that in this case, it's hoping a dying company will revive and goes back into a Growth company.

Wrapping Up

I hope how I try to categorise the stock market helps simplifying the understanding of the different characteristics of stocks. As you go through the different categorise and phases above, you should already have some companies in your mind and that should be exactly what you need to relate.

I feel that simplifying and understanding stock categorisation will build a foundation to get a better idea on market rotation topics and how money flow between the different categorisation. I'll probably cover that in a separate topic some other time.