Exciting growth companies appear all the time, but only a handful of these manage to ‘cross the chasm’. We spend time sifting through the pretenders, trying to isolate those which truly have the potential to be ‘multiple-baggers’.
Our screening process involves detailed checks and an understanding of the common features of successful Emerging Growth business models, which are often subtle. The stock market’s inefficiency in this area arises from its experience of seeing so many other ‘good companies’ fall into the chasm, and being unable to tell between the real prospects and the ‘fakes’. In our view, some of the largest anomalies can be seen in the valuations of Emerging Growth companies which are successfully exploiting an idea that failed in previous iterations (the stock market has often lost interest by the time the technology works well enough for the real market to take off).
We are governed by the belief that each successful new Emerging Growth company will usually take business away from a more established incumbent. These larger ‘dinosaur’ companies have mature products and are often too complacent, or lack the incentives to cannibalise their existing sales, with the better, newer product. Some ‘dinosaurs’ simply lack the necessary expertise or technology to adapt, and have to watch themselves go extinct. In many cases, the market’s valuation of these companies correctly reflects the fact that they are being displaced. In fact, their share prices can rise if valuation is low and earnings do not turn down as rapidly as expected. Our research does throw up some anomalies, however, where valuations are far too high and earnings forecasts overly optimistic.We choose to exploit these situations.