Workshop X: Growth Investing

Transcription

1 Workshop X: Growth Investing What is a growth stock? A company whose earnings are expected to grow at an above-average rate than its industry or the overall market. recovery shares emerging markets technology and internet stocks smaller companies 1

2 Growth vs. Value Common Myth: value investors look for shares that are cheap in relation to the net asset value of a company growth investors are only interested in earnings growth Growth vs. Value Underlying Principle: value investing is based entirely or mainly on quantitative criteria (numbers): on asset values, on cash flow, and on discounted future earnings growth investing is based on qualitative criteria: on value judgments about the business, its markets, its management, and its ability to extract future earnings growth from its industry 2

3 Scary? The Whole Story 3

4 New technology Ford Microsoft Genentech Google Domination of a niche Xerox Coca-Cola Blue Nile Whole Foods Typical Drivers Peter Lynch Manager of Fidelity's Magellan fund Grew from $20m in 1977 to $14bn by 1990 Fast growers keen on finding tenbaggers stocks that rise in value ten times In picking fast growers he observed the following rules: 4

5 Growth Stock Anatomy Peter Lynch small aggressive enterprises growing at 20%-25% a year winning repeatable formula healthy balance sheet and making profits simple businesses that anyone can run less fashionable industries P/E should be at, or near, the growth rate, which should be accelerating Ideal Growth Stock: Service Corporation International Boring name Unglamorous business (funeral parlors) Unfashionable Industry Franchisable Earnings growth (through economies of scale) 5

6 Peter Lynch s Top Ten 10. Know what you own and own what you know. 9. Buying stocks without studying the numbers is like betting without looking at your cards. 8. Buying a company with mediocre prospects just because the stock is cheap is a losing technique. 7. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what's actually happening in the companies in which you've invested. 6. You won't improve your results by pulling out the flowers and watering the weeds. 5. In the long run a portfolio of well-chosen stocks will always outperform a portfolio of bonds or a high interest account. A portfolio of poorly-chosen stocks will do worse than money left under the mattress 4. Just because the price goes up, doesn't mean you were right. Just because it goes down doesn't mean you were wrong. 3. You need only find a few good stocks to make a lifetime's investing worthwhile. 2. Ignore the herd. Peter Lynch s Top Ten 1. There is always something to worry about. 6

7 Jim Slater The Zulu Principle A positive growth rate in earnings per share A low P/E ratio relative to the growth rate Optimistic management Strong liquidity, low borrowings and high cash flow Competitive advantage Something new A small market cap Dividend yield Management should have a significant shareholding Earnings Growth Quiz Company A has capital of $100 and grows 10% per annum reinvesting its earnings every year. How much will its capital grow to in 15 years? Company B has capital of $100 and grows 30% per annum reinvesting its earnings every year. How much will its capital grow to in 15 years? Answer: A-$418; B-$5119 Company B's growth rate was 3x as fast as Company A's, but its accumulated capital after 15 years is over 12x higher. 7

8 PEG PEG = Price/Earnings/Growth Slater says look for companies around.66, but no higher than.75 Not easy to find in a bull market Blue Nile: 2.56 Amazon: 2.60 Google: 1.02 Genentech 1.09 Never pay [a multiple] more than twice the growth rate Jim Cramer Competitive Advantage Porter s 5 Forces Don t worry You ll learn it at length at least 14 times while at Stern 8

9 Small cap vs. Large cap Elephants don t gallop Coca-Cola s stock quadrupled from 1988 to 1991 Lesson: Large-cap growth companies can continue to grow as long as the market is big enough When to Sell The basic rule is: if factors which led you to buy the share in the first place no longer apply, sell it Substantial insider sales PEG too high Downbeat management sentiment The story has changed Catching this requires constant monitoring of your portfolio 9

10 Why Management Matters Most growth companies today have rapid revenue growth, but do not have earnings Companies can easily lose a lot of money early by spending heavily on marketing to get a market foothold It can take time for early-stage companies to generate cash from operations their survival depends on effective cash management so that they can meet expenses Why Management Matters Larger growth companies need to determine when their markets are tapped out or if they are expanding too fast High-tech managers need to create cultures that fuel innovation and creativity Since we are making a bet on the future, managers need a vision Analysts on average estimate that Apple s stock price will fall 25% if Steve Jobs leaves the company approximately $20 billion in market cap 10

11 Case Study: Whole Foods Market 2003: Whole Foods Market engages in the ownership and operation of natural and organic foods supermarkets Unglamorous (at the time) industry Small market cap and few locations Franchisable Good story the paranoid hippie population of major cities would want to buy organic foods Competitive advantage? DCF? Growth Phase : Whole Foods establishes itself as a lifestyle brand Able to charge higher prices Able to open new successful stores o o o 8.1% new store growth over past 5 years 11.5% same store sales growth over past 5 years 20% total sales growth 11

12 The Numbers FY 2003 FY 2004 FY 2005 FY 2006 Gross 34.3% 34.7% 35.1% 35.0% Margin Op. 5.3% 5.6% 5.3% 5.9% Margin Net 3.1% 3.4% 2.9% 3.6% Margin What happened? Expensive valuation Organic food is now a very lucrative industry Competition Wal-Mart, Safeway, Albertson s, Wild Oats Story has changed New store openings in smaller cities: Boise ID, Birmingham AL, Sugarland TX (pop. 76k)? Stupider Management CrustaStun in Portland ME 12

13 Q&A 13