If you’ve been following us for the past few months, we’ve been putting together a case for the emergence of growth plus value in the microcap space.
In our July 7, 2022 podcast with Tobias Carlisle, the Founder of The Acquirer’s Multiple, we got a really great perspective on this subject matter that fits nicely in the narrative of large cap overvaluation vs. opportunity in smaller stocks poised for growth on the basis of their underlying fundamentals.
He visited a phrase coined the “Nifty Fifty” that in two instances, decades ago, was applied to a group of stocks that were very relevant to investors who were looking to capitalize on what turned out to be disruptive, or popular high growth stocks, like Microsoft Corporation (NASDAQ:MSFT), General Electric Company (NYSE:GE) and Walmart Inc. (NYSE:WMT). Tobias recounted how history kind of repeated itself on these two occasions – during a boom in the 1960s to 70s, and in the wildly notorious dot com era, however it was not just relegated to those time periods.
He pointed to other historical patterns when investors successfully sought only high growth stocks, but while that was the ebb, the antithesis was the subsequent flow of value that crept into the equation – the so-called mitigator, the antidote – to keep things in check for a while after growth stocks or markets corrected.
We’ll take the confirmation bias while we can from a well-respected and learned peer like Tobias Carlisle, who we highly recommend following.
Below, he can be heard talking about this and a few other factors that might make those who are now only seeking the next Netflix, Inc. (NASDAQ:NFLX) take a step back and evaluate history for themselves for the mere fact that it is forcing us take a peek out of their comfort zones so as to avoid what we believe will become their mirage moving into the next decade.
This discussion is very relevant today where we have seen the broad market pull back sharply, ignited by the overvaluation in growth stocks. Now, we have been on the hunt for value stocks trading at reasonable valuations.
However, what makes our strategy a little different than a pure value investing strategy that may not be overly concerned about growth is that not only are we looking for companies that are traditionally undervalued based on measures of earnings and cash flow, but we are seeking companies that are growing sales and earnings at an even faster rate.
To be more specific, part of our multi-bagger formula is to look for companies that can grow revenue consistently at a rate of at least 10% to 15% with plenty of operating leverage, so that their earnings can grow significantly more than revenue, for example at least over 30% – Hence growth plus value.
That’s the part of the formula I used for the first 20 years of my investing career that worked really well, one that I think is coming back in right now.