Excellent growth oriented enterprises generally have the following characteristics: the profits of growth stock companies should reach new peaks during each economic cycle, and they should be higher each time; Strong ability in product development and market development; Always in a leading position in the industry, with strong comprehensive and core competitiveness; Having an excellent management team. The funds of growth companies are often used to build factories, purchase equipment, increase employees, strengthen scientific research, and invest operating profits in the future development of the company, but often distribute very small dividends. Investors in growth stocks should have a long-term perspective and hold onto them for as long as possible in order to gain substantial profits from the rise in stock prices.
1、 How to choose a real growth investment target?
Growth is generally measured by profitability, and good growth investments should seek companies with sustained and significant high-speed growth in net profit within 3-5 years. The biggest characteristics of these industries or companies are:
1. High competitive barriers (such as technological barriers, customer barriers, or scale barriers) are the most essential requirements for growth sub industries or companies;
2. The industry market size is generally not particularly small, which is only a necessary condition for big bull growth stocks, not a necessary condition for all growth investments;
3. In terms of demand dimension, the industry shows sustained positive growth (the emergence of new markets often brings the best opportunities, the industry growth space brought by industrial technological upgrading is suboptimal, and industrial transfer or import substitution can also be considered, but this is the least).
4. Continuous significant high growth "is the key to investing in growth companies, especially" sustained growth ", which should not be less than 3 years in principle.
If the dimensions of "sustained" and "significant" are repeatedly proven, they will enhance future growth expectations and enjoy a certain valuation premium. Sub industries or companies that cannot guarantee 'sustainability', such as the panel sub industry in the electronics industry, cannot be classified as strictly defined growth investment areas.
2、 When to invest and when to exit?
1. Long term exit point: the ceiling for the growth of the main business.
The ceiling is the most difficult dimension to measure. In my experience, new technologies or products often exist in monopolistic or free competitive markets when they are born. When products are produced in large quantities, the industry will evolve. As long as the competition barrier is high enough, most industries will eventually form an oligopolistic market pattern, resulting in the existence of two or several large oligopolistic manufacturers.
Ideally, the largest manufacturer in an oligopolistic competitive market can only gain a maximum market share of 50-70%. Therefore, based on the ultimate state of the company with PS=1, when a company's market value grows to 50% of the potential size of its main industry, I will become moderately cautious. However, when its market value grows to 70% of the potential market space, I will recommend selling unless it has better new business and starts a new growth cycle.
So, if the potential space cannot be measured and there is no reference company with a "reasonable market value", then when the market value is too large, investors will continue to worry about the ceiling issue, leading to a slight discount in valuation.
2. Short term buying and selling timing: poor expectations.
Due to the early or delayed effect of the stock market on the fundamental reflection of companies, changes in expectations may be an important factor leading to market buying and selling, and the asynchrony between expectations and fundamentals may result in periodic mispricing in the market, which is the expected difference we are looking for.
The so-called expectation refers to the evaluation of future cash flows and risks. The theory of expected difference includes comprehensive considerations of factors such as growth, underestimation, and timing, especially in short-term investment assessment, which is a relatively effective methodology. But the premise is to ensure accurate and timely bottom-up information mining, which is also the important significance of the existence of researchers.
In this methodology, we will focus on whether the market's expectations for industry and company fundamentals have changed, and whether there will be any changes in the future. Two preparations are needed here: (1) understanding what the market's consensus expectations are; (2) Explore unexpected information and set reasonable pricing. In fact, a large part of an analyst's job is to conduct extensive research, data search, and calculations to uncover information that differs from market expectations (i.e. mispricing), in order to determine whether a company should buy or sell.
