Companies, Anne-Marie Peterson observed early in her investing career, go through life cycle changes just like people do. Where individuals can experience childhood, college, raising children and having careers, companies might go through periods of rapid growth, maturation, shifts in their competitive landscape and sometimes stagnation.
“Consider U.S. home improvement retailer, Home Depot, which you could say grew up too fast,” recalls Peterson, who got her start as an equity analyst covering U.S. retail companies. “They opened a lot of stores rapidly, without building the necessary back-end infrastructure, like supply chain management systems.” With the market saturated and growth stagnating, Home Depot continued to open stores. The company appeared to be reaching its breaking point.
An outsider, Frank Blake, was hired as CEO. “He had no retail experience but was a great listener and had a knack for making the complicated simple,” says Peterson. “He identified the problem, halted new store openings and set about fixing the supply chain on the back-end. In other words, he stopped growth to ultimately resume growth.”
Like many of her colleagues at Capital Group, Peterson’s early experiences as an analyst helped shape her approach as a portfolio manager. “Retail is a very idiosyncratic sector,” she explains. “What I learned covering retail is that people matter a lot, and growth can come in many forms.”
Peterson recently sat down with us to share her perspective on growth investing over the next decade and offer some predictions for what the world might look like in 2030.
What characteristics do you look for in a growth investment?
My underlying investment framework is driven by three key principles:
Revenue growth drives earnings, which in turn drive stock prices. My starting point is to look for above-average revenue growth as a path to long-term earnings growth potential. Take the cloud as an example. Last year Microsoft’s Azure and Amazon Web Services together generated about $60 billion in revenue, which represents a fraction of the $700 billion addressable market for corporate IT spending.
People matter. When I invest in a stock, I tend to look at it as underwriting a management team or culture, so I find it important to feel comfortable with a company’s leadership. In fact, I spend as much time trying to understand the people as I do the business and financial statements. For example, when I was evaluating e-commerce company Shopify, I met several times with Tobi Lutke, the company’s CEO, to get to know him. This is a special founder who is mission-driven and is working hard to ensure Shopify is a 100-year company.
Change is a key catalyst for growth. Sometimes a CEO change can be a major catalyst, as was the case with Frank Blake at Home Depot or Satya Nadella at Microsoft.
During periods of significant change, industry structures can shift — for better or worse. Some companies get stronger, others grow weaker or fail. There's uncertainty, but also an opportunity to identify what the market might be missing about a company’s prospects. And there are few periods of change more significant than the one we are living through now.
Are today’s coronavirus-related behavior shifts creating a fertile environment for growth investing?
There are opportunities to find great long-term investments in any environment. The current period is no exception. Every market downturn is different. What’s interesting about the current period is that the disruptive tech and consumer companies that led during the expansion have continued to lead. Typically the market leaders going into a downturn haven’t led during or coming out of a downturn, but I think we are seeing a fundamental shift happening.