Earnings growth

Our professional carrier has primarily exposed us to a growth investing style.

The correlation between earnings and stock price is well entrenched in our reasoning when analyzing companies. Earnings growth is particularly important for long-term investors, as it is the primary driver of appreciation in a company's intrinsic value. Profit growth is therefore the essential condition for the capitalization of the investment.

At the same time, extrapolating past earnings growth to infinity, especially when historical growth has been strong, can be naïve. Every growth story has an end and even the strongest franchise will eventually be attacked by competition, new technologies, regulations or changing consumer preferences.

Companies generating strong earnings growth over an extended period gain market recognition and tend to trade at high valuations. They can become arrogant and over time make increasingly bold strategic moves that often end up being mistakes. The higher the valuation multiple, the greater the requirement in understanding the moat, reading the strategy, and estimating future earnings. Indeed, highly valued companies pay a higher-than-average price for disappointment. Moreover, these same companies attract more interest from competitors and must defend their competitive advantages more and more vigorously. Some of them succeed, defy gravity, and provide decades of growth for their shareholders. However, these are rare exceptions.

Accurately predicting growth and its longevity is a delicate exercise. Therefore, particular caution is required when dealing with companies “supposed to grow infinitely” and so highly valued. On the contrary, companies with more modest growth but with a potential for acceleration can offer great opportunities because they are often neglected by investors. The improvement in the economic situation, the return to the average profitability, the structural evolution of the dynamics of growth, are among the sources of positive change.

Solid growth generators are great potential investments, and we always actively search for those where the market misinterprets growth momentum and/or its longevity.