As the stock market continues to switch between winning investing styles, traditional value, quality, income, or growth approaches won't help investors consistently outperform.
Top-performing fund manager Peter Rutter attributes the consistent outperformance of his Royal London Global Equity Select Fund to 'corporate lifecycle' investing over the past three turbulent markets. I think it's thanks to that.
“You can make money for your clients in completely different ways at different points in the lifecycle,” Rutter says. “If you find another job, you'll make money.” Nvidia (US:NVDA) But you can also profit from smartly managed companies that have fallen out of favor and trade at incredibly attractive valuations.
What is the big idea?
The modern concept of the corporate life cycle is based on five to six clearly defined stages. This idea started gaining attention among academics and investors in his early 2000s and was further developed in the 2010s.
The basic premise is that while companies experience rapid growth in their early stages, they tend to become more profitable, as measured by the widening gap between the return on investment and the cost of investment. That's it.
After that, profitability begins to plateau and growth slows. As competition increases and growth opportunities decrease, companies begin to return more money to shareholders. Finally, the profits are less than the cost of the investment and the company is liquidated.
The lifecycle of a company is different from ours because companies can go back to their early stages. Reverse aging can yield huge shareholder returns.
For example, a study published last month by renowned Morgan Stanley market strategist Michael Mauboussin found that investors, on average, lose the most when holding stocks in companies that are in the final stages of their corporate life cycles. The companies that return from this final stage to a highly profitable growth stage are the ones that benefit the most, while suffering the most.
Management actions or changes in market dynamics can turn the clock back on a company.
A cash flow statement allows you to formally identify where a company is in its life cycle. This analysis forms part of the quantitative process that Rutter and his team use to search for investment ideas.
Mauboussin's recent empirical research confirms the value of cash flow analysis and reveals that the number of years a company has been on the stock market is also a poor indicator of a company's current status in its lifecycle. did.
The company lifecycle provides a framework for identifying how best to manage a company at each stage and how investors can analyze and value companies.
Create a portfolio that includes investments across the lifecycle, as each stage of a company's lifecycle is aligned with the best-tested sources of market-beating performance, including momentum, quality, low volatility, and value. helps counter style bias.
The Royal London Global Equity Select Fund's top 10 holdings demonstrate that an eclectic mix of stocks delivers market-beating returns. The fund has recently been restricted from access to investors after receiving large inflows.
Source: Citywire/Morningstar, latest holdings data. PE = price earnings ratio, EPS = earnings per share. PE and EPS growth rates are based on expected earnings over the next 12 months. Ebit = Earnings before interest and taxes.
To better understand how Mr. Rutter's approach works in practice, Citywire Elite Companies takes a closer look at some of Mr. Rutter's favorite portfolio holdings, which in Royal London terms: I've illustrated all five life cycle stages.
- To accelerate
- mix
- deceleration and maturation
- mature
- turn around
Acceleration: Nvidia
Companies in the acceleration stage of their lifecycles have a huge opportunity in front of them that they are trying to grab with both hands. Growth is rapid and investment is significant.
To evaluate these companies, investors focus on base unit profitability, whether it's a shop or a software customer, or look at tangibles such as whether the CEO is the CEO. It is often necessary to use unconventional evaluation techniques, such as paying attention to elements that do not exist. Charisma to attract more money.
Although this stage in life is often associated with young money-losing ventures, there are times when companies are well established and still fit into this category. A case in point is Mr. Rutter's A-rated Nvidia stock in Citywire. The company has been in business for 30 years and is a very large and highly profitable semiconductor design company.
The explosive growth opportunities that put Nvidia in an accelerated phase of its corporate life cycle have been made possible thanks to the mass adoption of graphics processing units (GPUs), a semiconductor technology that the company has pioneered since its founding in 1993.
Rutter sees the value of these chips as countering the end of Moore's Law, the long-term trend of semiconductor capacity doubling every two years.
As cutting-edge semiconductor manufacturers are now pushing chip sizes below five atoms, the miniaturization process that has driven Moore's Law and fueled exponential growth in computing power for decades is pushing chip sizes below five atoms. We are reaching our physical limits.
Nvidia's chips address this problem by focusing on performing single tasks at breakneck speeds. Continually improving performance by design meets the data-intensive needs of today's most exciting computing technologies, including artificial intelligence (AI), the Internet of Things, and virtual and augmented reality.
The company's stock has quadrupled in earnings over the past year, driven by a surge in demand from data centers that Nvidia executives have in the past referred to as “AI factories,” and brokers are predicting rapid growth.
Nvidia boasts significant competitive advantages, including:
- established relationship with TSMC (TW:2330) holds a near-monopoly position in cutting-edge chip manufacturing.
- Huge research and development budget.
- Vast amount of intellectual property related to chip design.and
- Thanks to a software suite that helps engineers design their chips to be integrated into their products and systems, they can build stable relationships with customers.
Nevertheless, the company exists in a fiercely competitive industry. “The big threat from here is that someone, or multiple other companies, could become the equal of his Nvidia and its ecosystem,” he says Rutter. “That valuation strongly suggests that the company will be a dominant player in this space for a long time to come.”
There are credible threats from other big chip companies like A Rating. AMD (US:AMD) and AAA rating intel (US:INTC), as well as large technology companies that develop application-specific semiconductors in-house, including AAA ratings. alphabet (US:GOOGL) and Amazon (USA: AMZN).
Rutter's views on high expectations may help explain Nvidia's sudden drop in its elite company rating from AAA to A in August. Rutter, a longtime Nvidia holder, recently pared down his fund's position following this year's incredible returns.
| important facts | |||
|---|---|---|---|
| Market-first orientation | $1.1 trillion | price | $461 |
| Net cash/debt(-) | $1.3 billion | 52 week high/low price | $503/$115 |
| forward price earnings ratio | 30.4 | forward dividend yield | 0% |
| Future free cash flow yield | 3.1% | 3 month stock return | 1.4% |
| return to capital employed | 16.2% | EBIT margin | 33% |
| 5 year FCF conversion | 98% | 5 years capital investment/sales | 5.5% |
| 5-year sales CAGR | 22.7% | 5-year EPS CAGR | 7.7% |
| Predict EPS growth | 77.3% | 3 million expected EPS change | 44.5% |
Price/earnings ratio, EPS growth, and dividend yield based on 12-month expected earnings. EPS = Earnings per share. CAGR = compound annual growth rate. Ebit = Earnings before interest and taxes
Stay tuned next week for an analysis of companies in the other four stages of the corporate lifecycle.
