Nothing excites more than growth and investing for growth, but how would you characterize the stock price zooming lot more in a period of low/zero interest rate. Does earnings start to matter more in a non zirp environment? Likely comes down to who is at the top making new growth investment decisions, only few Buffett and Bezos out there unfortunately
Yes, it really comes down to understanding the business and the founder. It’s hard. I tried to think of some metric to add to the article, but in the end I couldn’t come up with a good one size fits all answer.
Excellent! The trick is finding the companies that actually have the opportunities to reinvest- or have the management teams with the skills and ba**s to pull it off. These teams do not grow on trees!
How about new capital investment as a percentage of ´sales’ - whether they are fairly measured becomes an issue of course… deflated by net new debt taken on?
Thanks Erik for another interesting post. I am wondering whether the fact every man and his dog has bought into such growth story stocks already that real cashflow value stocks are systematically cheap and might offer the right place to invest. I like being paid 5%+ dividend yield on a companies with PE<10 especially if growing earnings (you would know they exist outside the US).. I hear you regarding the tax leaks but most often when I find a cheap stock it tends to rise in price and yield fall over time (as long as the stock is not a dog in a dying industry). In a similar vein I think buying the high revenue growth stories works best if you catch them early and only a few became mammoths like Amazon. It is harder to know (and perhaps lucky to find at the right time) when a zero earnings company is cheap, whether sales will keep growing and finally if share price will keep going up - its a bit ponzy like investment - hope someone else will buy at higher price than me rather than earning a proper return through earnings and cashflow!
Hi Tom. In the end I’m the same way. I like the optically appealing valuations and the dividends. And it was why I got so excited when the Chinese tech stocks crashed. Finally you were able to get Amazon-like companies and normal valuations. I agree it’s hard to know if a company not earning any profits is the next Amazon, or just a bad business. But for me it was a realisation that when done well, it can actually be a superior strategy and makes fiscal sense. It’s not total Silicon Valley nonsense. But it’s hard to invest into companies like these in practice.
One metric Bezos really focussed on was cash flow (or fcf pre growth investing), which allowed him to operate the co without needing to raise more capital. The cash flow growth also becomes a good metric for seeing if new investments are heading in the right direction.
Yes, that’s the way to analyze it, but it’s really hard to tease out how much of the expenses are ‘growth expenses’. They don’t separate which expenses are maintenance, stays quo expense, and what is for new greenfield growth. People try to estimate it, but it’s an estimate.
Excellent article Eric. How would you spot those companies? I mean, if earnings are not relevant in this case, what kind of filter/metric should you employ in order to come up with these type of companies in an screener?
I know…. It means you really have to understand what the company is doing. There is no easy metric. I was thinking maybe Price to Salea Growth instead of Price to Earnings Growth, but I’m not sure there is a once size fits all screening metric. It makes it difficult.
Thanks for this Erik - I love how often your articles challenge my preconceived notions.
Nothing excites more than growth and investing for growth, but how would you characterize the stock price zooming lot more in a period of low/zero interest rate. Does earnings start to matter more in a non zirp environment? Likely comes down to who is at the top making new growth investment decisions, only few Buffett and Bezos out there unfortunately
Yes, it really comes down to understanding the business and the founder. It’s hard. I tried to think of some metric to add to the article, but in the end I couldn’t come up with a good one size fits all answer.
I wanted to start by opening our mind to the idea companies may be intentionally minimising earnings.
Excellent! The trick is finding the companies that actually have the opportunities to reinvest- or have the management teams with the skills and ba**s to pull it off. These teams do not grow on trees!
Great parallel with Berkshire and new lens to look at those growth stocks.
How about new capital investment as a percentage of ´sales’ - whether they are fairly measured becomes an issue of course… deflated by net new debt taken on?
Yes something like that might be the new metric, or at least another metric to follow.
Thanks Erik for another interesting post. I am wondering whether the fact every man and his dog has bought into such growth story stocks already that real cashflow value stocks are systematically cheap and might offer the right place to invest. I like being paid 5%+ dividend yield on a companies with PE<10 especially if growing earnings (you would know they exist outside the US).. I hear you regarding the tax leaks but most often when I find a cheap stock it tends to rise in price and yield fall over time (as long as the stock is not a dog in a dying industry). In a similar vein I think buying the high revenue growth stories works best if you catch them early and only a few became mammoths like Amazon. It is harder to know (and perhaps lucky to find at the right time) when a zero earnings company is cheap, whether sales will keep growing and finally if share price will keep going up - its a bit ponzy like investment - hope someone else will buy at higher price than me rather than earning a proper return through earnings and cashflow!
Hi Tom. In the end I’m the same way. I like the optically appealing valuations and the dividends. And it was why I got so excited when the Chinese tech stocks crashed. Finally you were able to get Amazon-like companies and normal valuations. I agree it’s hard to know if a company not earning any profits is the next Amazon, or just a bad business. But for me it was a realisation that when done well, it can actually be a superior strategy and makes fiscal sense. It’s not total Silicon Valley nonsense. But it’s hard to invest into companies like these in practice.
It be interesting to see the post hoc performance of all companies that announce an ASR. :)
One metric Bezos really focussed on was cash flow (or fcf pre growth investing), which allowed him to operate the co without needing to raise more capital. The cash flow growth also becomes a good metric for seeing if new investments are heading in the right direction.
Yes, that’s the way to analyze it, but it’s really hard to tease out how much of the expenses are ‘growth expenses’. They don’t separate which expenses are maintenance, stays quo expense, and what is for new greenfield growth. People try to estimate it, but it’s an estimate.
Excellent article Eric. How would you spot those companies? I mean, if earnings are not relevant in this case, what kind of filter/metric should you employ in order to come up with these type of companies in an screener?
I know…. It means you really have to understand what the company is doing. There is no easy metric. I was thinking maybe Price to Salea Growth instead of Price to Earnings Growth, but I’m not sure there is a once size fits all screening metric. It makes it difficult.
Thanks for your replay Erik. On my way to work listening right now to your latest podcast with Value Hive. Awesome stuff.