BC VALUATION
Saved by @AnmolNarula11

As investors, we need to qualify the companies in our portfolio.

If they don't meet our cut, we don't invest in them.

Apart from the eventual/current profitability and strong balance sheet, growth is my top requirement.

Here's why:

 1/ If a business does not grow, its share price will not grow.

In a corporate lifecycle, a company experiences most growth during its expansion phase. That's where most returns are being created.

This is why high growth companies deliver huge returns.

source: Ravi Kumar
2/ The compounding of growth rates is often underestimated.

It can do wonders for your company.

Growing at 30% turns $1 to $13.79 by Y10.

Growing at 10% turns $1 to $2.59 by Y10.

The share price returns a company can generate based on this is significant.
3/ Here's an example: Crowdstrike $CRWD

It grew its ARR from $71 million in 1Q 2018 to $1,731 million in 4Q 2022.

The magic of compounding.
4/ Simple Back Test

I used my Capital IQ to find out what are the stocks that delivered more than 10x returns in the past 5 years and have at least a market cap of $600m USD.

There are 13 companies.

$APPS $XPEL $TSLA
4/ Simple Back Test (continued)

Apart from Ameresco and SolarEdge, others exhibited huge revenue growth.

This tells us future growth is an important ingredient for long term success.

This is echoed by Stanley Drunkmiller too.
5/ Growth stocks seem to be out of favour but have they truly underperformed?

Look at this picture.

Left: Year-til-Date
Right: 5 Yr Results
8/ Growth is the Long-Run Driver of Stock Performance

What we're experiencing now is most well-explained by this graph by Morgan Stanley.

In the short term, multiples are compressing due to interest rate hikes.

But...

In the long term, revenue growth drives returns.
That's a wrap!

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The shorter your holding period in a stock, the more important the price you buy at (P/E, P/B, etc.) and the price you sell at (P/E, P/B, etc.)

The longer your holding period in a stock, the more important the return on capital/growth rate of the company you’ve invested in
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Paying 50-100x earnings for 'blue ocean' sectors has become normalized with promise of changing trends and immense future opportunity. Stock markets look forward, if the future opportunity is great, in most cases that 100x valuation already factors a 30x valuation in 3 years.

For investors, the question of where the buck stops is difficult to answer, because the goal post keeps changing. 30x is reasonable for one business, for another 70x is acceptable. So why not everything in between too?

Not every business captures the opportunity available. There is many a slip between the cup and the lip, as my English teacher used to say. When investors have seen valuations creep from 20x to 100x in a matter of a year or two, it is easy to to keep dancing to the same music.

But like we used to play musical chairs in childhood, someone will be left standing too. And here the rules aren't that 1 person gets eliminated at a time, hundreds get crushed at the same time. In childhood, we had a 1/X chance of being caught standing when the music stopped.

The margin of safety was high till you got down to the last 3-4 people playing the game. Similarly, your margin of safety reduces dramatically when valuation becomes irrelevant. A few months of underperformance and suddenly things don't look so rosy any more.
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kumar saurabh
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@suru27
@_CreatingWealth sure, only request. Plz do not take it negative. Get over metric like PE, even if use it , at least take cash flow based PE. Many times, it would make worst investments attractive n decent one unattractive. It has lot of bias, limitation n constraint. 1 must know before using it
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Brad Kaellner - Stock Compounder
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It’s perfectly possible for a company to generate rising EPS at the same time it is employing increasing amounts of capital at falling & inadequate rates of return

In laymen’s terms, a company can be busy destroying shareholder value even as it increases earnings

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