Spotlight on Quality Growth: Key Tips from Leading Portfolio Managers
More standout stocks from a top investment conference
This is the fourth in a series of reports from the Quality-Growth conference in London. This week we continue with more of the recommendations and some musings on quality growth.
I have done this in chronological order of presenter rather than my favourites, but I have highlighted which of the recommendations I have liked – one is my largest position - and which I didn’t.
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The presenters at The Quality-Growth Conference 2024 were:
UK Managers
Nick Train, PM & Co-founder, Lindsell Train
Christopher Rossbach, Co-founder and Managing Partner and CIO, J Stern &Co
William Low, Global Equity PM, Nikko Asset Management
Kinal Desai, Co-PM Global EM Equities, GIB Asset Management
Stephen Yiu, Founder and CIO Blue Whale Capital
Stephanie Niven, co-PM Global Sustainable Equity, 91 Asset Management
James Anderson, Managing Partner, Lingotto Investment Management
US Managers
Rebecca Irwin, Global Equity PM, Jennison Associates
Andrew Brenton, Co-Founder and CEO Turtle Creek Asset Management
Angela Wu, Analyst, Artisan Partners
Alex Lee, Principal and PM Sustainable Growth Advisers
Europe/Hong Kong
Laure Negiar, Global Equity PM, Comgest
Ronald Chan, Founder and CIO Chartwell Capital
Before premium subscribers read on for another bumper pack of quality growth stocks a few words on this Quality - Growth category. I have discussed this before in the context of this conference and highlighted the common terms being used. Regular readers will be aware that I don’t really like the value vs growth monikers and consider myself in neither camp - the terms are often unhelpful and even misleading. I have mentioned before a value investor with a portfolio P/E above the market average.
The factors these specialist fund managers consider constitute a quality growth stock have included:
Financial Strength: eg Strong balance sheets
Management: eg Trusted and capable leaders
Growth: eg Sustainable growth potential
Quality: eg Competitive advantage through pricing power and high margins
Financial strength: I think we can take this as a given because without enough cash, a growth company won’t last long. We generally want to invest in companies that have strong balance sheets.
Management: This is a more difficult concept in my view. Presenters often talk about “trusted management“, “good management” and “capital allocation”. Of course, everyone wants to invest with managers who are honest stewards of the capital you entrust them with. But it’s really difficult to form a judgment, before the delivery and before the stock reflects that.
Growth: This, of course has been a popular term at this conference – “growth”, “runway for growth”, “secular growth” etc. There is usually less attention paid to the cost of growth – customer acquisition cost, of capital required for growth or even the dreaded churn. Tech stocks often feature heavily and the cost of growth should be a prime focus for investors.
Quality: The single most repeated quality factor in these presentations is usually competitive advantage and it’s often cited as part of the process, but I have yet to see how managers determine if a company has a real or sustainable competitive advantage.
In my view, the characteristics of a company with competitive advantage are
Pricing power
High gross margins
High and growing EBIT margins
Revenue growth superior to the sector average
High, possibly increasing and hopefully stable returns on capital
Other quality factors cited have been:
Economies of scale
Cashflow predictability
Pricing power
Risk of disruption
Macro sensitivity
Repeat revenues
Nothing wrong with any of these. I think true economies of scale which confer a real and sustainable advantage are quite rare – Amazon and WalMart are examples where their scale is at a different level from competitors, but I struggle to think of many more. Perhaps Ryanair.
Cash flow predictability is a characteristic of a stable business – a utility or consumer staple. Pricing power is a major differentiator for companies now, especially in an inflationary environment (although it is equally helpful in deflationary times).
Repeat revenues are highly valued by the stock market and subscription businesses have seen a significant rerating especially in the tech sector. The good news here is that there are warning signals in the financial statements if trouble is brewing here, something I cover in my Forensic Accounting Course.
Quality has been a free lunch for a long time in the stockmarket as it has delivered higher returns with lower volatility. But quality valuations have more than doubled since Fundsmith was launched and it’s debatable whether this will or even can continue. Meantime growth has been spectacular and similarly has been and continues to be highly valued. Maybe valuation doesn’t matter – three very different investors complained to me this week that nobody cares about valuation any more and that makes life much more difficult for a disciplined investor.
Perhaps that’s about to change. We shall see. Premium subscribers can read on to find out
Why I teased Ronald Chan on one of his 3 China picks (Hong Kong quotes)
The worst marketing pitch I have heard in a while
Two interesting media picks
Two healthcare picks
An environmental consultancy pick
My conclusions
Footnote: Some of this will have to wait until next week, as I ran out of space.