Secular Growth is the Best Kind of Value
As we scour the investment landscape for inflections – meaningful signals that presage a future that is more dynamic than the past for markets, asset classes and companies – we often encounter companies whose businesses are “secular” in nature. In the investing world, the word “secular” is more often used to describe market conditions, good or bad, that are likely to persist over time (i.e. a secular bull or bear market). We wrote a blog about this topic back in January (Investing in a Secular Bull and Bear Market).
As it applies to individual companies, secular implies an ability to consistently deliver financial results regardless of the economic backdrop. Many would argue that branded consumer staples and healthcare companies (think P&G and Bristol Myers) fall into this category – after all, even in a recession, we will prioritize washing our clothes, brushing our teeth, and taking our medicine. For these reasons, these types of companies are often called recession-proof. But where’s the growth?
In our view, secular growth requires an inflection and the ability to capitalize on it steadily over time. As we have discussed previously, inflections represent a change which can be specific and internal to the company itself or come from the environment in which it operates. So, for us, the secular aspect of a growth story speaks not to the inflection itself, but rather the sustainability, duration, and magnitude of the inflection opportunity. Generally, the more secular an inflection, the more economically meaningful the ultimate outcome.
So, why is investing in secular growers better than investing in companies that are fundamentally “cheap” based on an assessment of intrinsic value (i.e. value investing)? Simply put, we would rather rely on demonstrated, dynamic earnings growth to drive a stock’s price higher than a change in market perception that requires reconsidering and repricing a stagnant and economically dependent earnings stream. In up markets, the stocks of secular growers can benefit from both the earnings growth and general multiple expansion. In down markets, rising earnings cushion the downside that results from broad multiple contraction. And there are other considerations:
Intrinsic value is in the eye of the beholder, while growth can be demonstrated.
Even if an investor is right about intrinsic value, mispricing can persist over long periods.
Behold the value trap — sometimes a stock is cheap for a reason.
Most cheap stocks have a cyclical nature — requiring an economic and/or market call.
In no way does this mean buying stocks as cheaply as possible isn’t important – absolute and relative valuation is an essential pillar whenever we validate an investment opportunity. But in a world of secular bull and bear markets, buying “cheapness” without growth is as useful as a screen door on a submarine.
Validus Growth Investors, LLC seeks to invest in companies at every stage of their growth. From startups to publicly traded companies, our research identifies inflection points that have the potential to produce meaningful growth and income for the clients we serve.
Investment Advisory Services are offered through Validus Growth Investors, LLC (“Validus”), an SEC Registered Investment Adviser. No offer is made to buy or sell any security or investment product. This is not a solicitation to invest in any security or any investment product of Validus. Validus does not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific situations. Intended for educational purposes only and not intended as individualized advice or a guarantee that you will achieve a desired result. Opinions expressed are subject to change without notice. Investing involves risk, including the potential loss of principal. No investment can guarantee a profit or protect against loss in periods of declining value. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Opinions and projections are as of the date of their first inclusion herein and are subject to change without notice to the reader. As with any analysis of economic and market data, it is important to remember that past performance is no guarantee of future results.