Some growth stocks, such as major tech companies, had a mostly good run since the start of 2023, but their performance has been unequal. The “Magnificent Seven” stocks have mostly been driving the rally in the S & P 500 . In fact, growth stocks overall had “a very difficult time” in 2022 and some funds have not made a full recovery, said Nick Griffin, chief investment officer and founding partner of Munro Partners. “We had one of the biggest growth wipeouts we’d seen since the dotcom crash and a lot of growth managers … have not gone back to their previous highs,” he told CNBC Pro . “What that does is it cleanses the system to a certain extent. So why did the wipe out happen? because interest rates went from zero to 5% really quickly, assets got revalued really quickly. And a lot of smaller competitors lost access to capital altogether,” Griffin added. How does he identify the winners among the huge universe of growth stocks out there? Griffin, who manages the Munro Concentrated Global Growth Fund and the Munro Global Growth Small and Mid Cap Fund, says he focuses on structural earnings growth. That is, companies that increase their earnings regardless of what happens in the economy. “Because that’s a better chance of making money than trying to work out what the economy is going to do, which is hard,” he said. “So just focus on companies that can grow somewhat independently in the cycle, and we organize them into these areas of interest or themes.” Some companies are growing only because of macroeconomic factors such as improving gross domestic product, or terms of trade but “don’t necessarily have an edge” on their own, added Kieran Moore, also a portfolio manager at Munro. There are six qualities that make a “great” growth company which can double their earnings, according to Griffin and Moore. The companies should be growing, with revenues hitting at least double that of the current GDP. Companies need to be able to take advantage of that growth. That means they should have some degree of pricing power or competitive advantage where their earnings or their EBITDA (earnings before interest, taxes, depreciation, and amortization) is actually growing faster than their revenues. That growth should be sustainable for a “long period of time,” based on attributes such as total addressable market, and volatility in operating income or profitability over time. A good ESG rating, according to Munro’s in-house ESG scoring process. Have management teams that are “highly aligned” with their shareholders. These companies should have “amazing customer perception” of their products — proven through data such as Google trends and reviews. “So what we hope to see is the potential for the earnings of our companies to double over a five year period,” said Moore. “Our investment process targets stocks that can double their earnings over a 5 year period, which implies that their earnings should approximately grow at least 15% per annum,” Griffin added. Stock picks Currently, Griffin’s biggest focus is in the area of high performance computing, he said. “So for a long time we’ve thought the companies that help computers go faster, will win. Because fast computers is the key to all human innovation,” he said. He named some stocks in his fund that tap the trend: Nvidia , ServiceNow , TSMC and Wise . These are the top 10 holdings of the Munro Global Growth fund. Though large-cap stocks make up most of his investments, Griffin also likes some smaller-cap names that are “not expensive.” That includes Pinterest and GoDaddy , which he says have the potential to be big beneficiaries of artificial intelligence as well.
link
