The Growth Era Is Here

May 13, 2020 - Max Osbon (4 mins to read)

Investors everywhere today are seeking answers to the same question: In a complex and uncertain world, where can we find reliable investment returns with reasonable protection from risk? With COVID reshuffling the cards, some clear investment patterns are emerging.

Prices tell us what we need to know

Prices of high quality businesses have increased significantly from the March lows. The best businesses are those with strong balance sheets, reliable income sources and strong future growth prospects (with and without COVID).

AMZN is a good example. We all use them for shopping, cloud computing, online video, books, groceries (via whole foods), etc. It’s so big that it’s partnered with the US government. It has its own well-established fleet of trucks and airplanes. It also has a relatively small market share in each major sector. Given the size of the markets they compete for, Amazon could be the first $2T company. A $3T or $4T valuation is not out of the realm of possibility over the next 5-10 years.

Amazon is one of many companies that is thriving and unfazed by the new coronavirus reality. This has been reflected in the price, which is trading at all-time highs. Stanley Druckenmiller said on Tuesday, “We should just get down on our knees and thank the Lord that this company existed in this pandemic.”

It’s fairly easy to see which companies are the “good” companies today. The best ones are confirmed by price and the weakest businesses are still trading near the bottom of their 52-week ranges.

Investing in growth

Today’s growth companies went into 2020 demonstrating their ability to solve problems, provide value, and grow their revenue. During the coronavirus challenges, growth companies grew their revenue, assisted by technology. In fact, the overwhelming majority of today’s growth companies are technology-based businesses that have benefited from our reliance on technology during the quarantine.

Nearly every growth company has an artificial intelligence plan. Paypal uses AI to deduct fraud patterns, Facebook uses AI to screen for offensive content online, and Uber uses AI to match riders and drivers. The list goes on and on.

The old economy and the new economy

Lately at Osbon Capital we’ve been talking about the growing division between the old economy and the new economy. Every sector has examples of technology-focused companies that are nimble, scalable, and ready to dominate their competitors.

Paypal is larger than Morgan Stanley and Goldman Sachs combined, but still smaller than JPMorgan. Twilio (online voice APIs) could someday overtake AT&T. Cloudflare keeps the internet running safely and smoothly, which is clearly a vital attribute today. Nvidia makes the chips that power your laptops. In Canada, Shopify recently shot past Royal Bank of Canada to become the country’s largest company.

COVID has only accelerated technology and work from home trends. Companies that fit into these trends can rise to be the market leaders that drive the U.S economy. We’ve come to appreciate how quickly this happens.

Scalable technology-oriented businesses are clearly the path forward. As Jeff Bezos says, “never turn your back on the future”.

While the world is focused on the virus, real research and development progress is being made. Neuralink (via Elon Musk) is a great example. They are creating a brain/computer interface to help stroke victims regain control over their body movement. Eventually, Neuralink has the potential to revolutionize our lives the way smartphones did 10 years ago. It already has 90 employees and is probably just 5 years away from producing real results. You can’t invest in Neuralink today, but fans of Elon invest in TSLA with hopes to get exposure to all of his best work.

Fairly valued prices

None of the stocks that benefit from these accelerated trends are cheap or bargains today. However, the best stocks often constantly trade at and around their highs. Time is in their favor and waiting too long to participate risks missing out.

Many traditional value investments are stuck at the moment. I won’t name names to single out any one lagging company, but you don’t have to look far. Their prices are down for a reason. Many have lost revenue and, depending on the scope of the virus, have long roads ahead before they start to see economic recovery. For value companies especially, the virus is a major factor in the future of their business.

What’s next?

In order to build an effective investment strategy, it’s best to start with a solid understanding of how your portfolio is connected to your future income and expenses. We call this liabilities based investing. The goal of any family investment strategy is the protection and growth of capital. Despite the many obvious challenges today, we see many opportunities for growth and protection.



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