The company Apple is one of the great growth stories of the early 21st century, as well as a tale of redemption and return from the ashes. In a number of respects, however, AAPL is an atypical growth stock.
Ultimately, that’s what I want to talk about. But I’ve decided to take the long way around and start by writing in general about growth stock investing.
Growth stock investing is all about finding extraordinary companies or industries.
The growth stock investor looks for two things:
–a firm that will expand its earnings per share at a faster rate than the consensus expects, and
–that will do this for longer than the consensus expects.
The growth investor has to make two key judgments:
–that a company has the potential for superior growth, and
–that this potential is not yet recognized by the market (meaning is not yet factored into today’s price).
analyzing a growth stock
The analysis of company fundamentals also has two parts:
—qualitative, a description of what makes the company unique and what will defend it from competition as it expands. Most often, in my experience, this can be condensed into an “elevator speech,” like “AAPL is the leading maker of high-end smartphones, a huge, rapidly expanding global market.” or “Amazon is the dominant force in Cloud services and in online retail, two fast-growing barely penetrated markets.”
—quantitative, meaning spreadsheets projecting one’s best guess about how the financial statements–income statement, cash flow statement and balance sheet–will play out over the next several years.
open-ended is good
Often, although the spreadsheets have numbers in all the appropriate fields, the quantitative analysis has an open-ended aspect to it. I may end up concluding that I’m confident eps will be up at least by 25% in the coming year …but it could easily be 50% or more. Uncertainty, yes, but of the best possible kind.
why the elevator speech
The elevator speech has two important purposes:
–it forces the analyst to step back from the numbers and pay attention to what the company’s competitive advantage is
–as a growth idea gets long in the tooth, it’s most often the story that breaks down, not the numbers. So the qualitative analysis ends up being an early warning sign that one should reduce exposure or exit the stock entirely.