The oddest thing about the stock performance of Nvidia (NVDA) after its earnings, to my mind, is how big a surprise it was. Because of the huge post-earnings stock price rise, it almost looks like the market was thinking that 3Q24 had been a cyclical peak for NVDA and that 4Q results would be–contrary to the past pattern of seasonal strength–down. My issue with this reading is that it assumes that the market knew a lot less than you or I. Realistically, every time we trade, we must believe something like that. But my experience is that this is a bad mindset to embrace, or at least one mostly adopted by the dumb money.

Today, though, I want to write about another characteristic of the best growth companies–reinvention.

Let’s say a company creates a radically new product or experience. For example, you’re Walmart (Wal-mart back then) and you begin to open superstores in towns of under 250,000 in population in the US. It’s a great success, earnings explode upward the stock rises sharply.

Then, two things happen. Others try to imitate you (unsuccessfully, in this case, as it turned out) and analysts look at government data that show how many small towns like this there are and figure out how long WMT’s growth spurt can last.

For WMT, it was a long time. But for the average innovator, facing effective competition, the period of explosive growth is something more like five years.

In the really great growth stories, the company is already thinking ahead and has plans for second and third acts. In WMT’s case, it was warehouse stores, then expansion into Mexico, then into groceries… After a considerable fallow period, it seems to me that WMT is trying to transform itself again into a competitor to Amazon.

Another example:

Coach, a sleepy leather goods firm, was spun off by Sara Lee (which had bought the company in 1985) in 2001. At that time, the company’s target market was women 20-45, with somewhat above average income. As an independent company, Coach did several things, in sequence:

–it moved itself upmarket by offering more stylish, less “classic” bags

–it moved into the southern US, offering brighter colors and lighter, non-leather bags

–it shifted manufacturing from the US to China

–it expanded internationally.

This all added up to a spectacular decade-long stock market run.

Or Apple, which went from a near-death experience in the early 2000s to the iPod, the iPhone, the iPad, and the App Store

Not every company can do this. Think: Cisco, GE, GM, IBM, Intel… It’s probably most important to remember that many well-known firms do go ex-growth and that when this happens, the stock price action can get really ugly.