'Multi-baggers': what an alluring yet elusive concept. A dream that every investor cherishes and yet only a few are able to achieve. The trick is to identify a company early in its life cycle, and hold on to it for a long time. Sounds simple but believe me it is quite complicated to execute.
The moot point here is — how do we identify a great company? A business that would continue to register steady yet consistent growth year after year, to help us compound our wealth. Well, in my 16 years in equity markets, I have seen many such companies, which have gone from being multi-million to multi-billion dollar in market cap. Each one of these businesses have five common traits. Look out for businesses that possess these and you have hit a home run!
Let’s take a look at these common traits:
A. Insatiable hunger for growth: Be it volume growth or margin expansion, great businesses never rest on their laurels. Their hunger for growth is always insatiable. However, not just growth, but sustainable and steady growth while containing the balance sheet risk. A steady mid-teens growth over long periods of time works wonders for the power of compounding.
B. Market leadership: A strong leadership position with competitive advantage is extremely important. As industry grows all participants benefit but the bulk of the benefit goes to the top player. A leader should be able to shape the industry growth path, overcome obstacles and lead into the future. These traits make for a sound long-term investment.
C. Constant innovation: This is needed to create new categories, which can be the second and third leg of growth. When the current business starts maturing, there needs to be a backup option or maybe even two. Great leaders always think ahead and are preparing for the long term. The innovation needs to be synergistic and should expand the horizon.
D. Great HR practices: Nurturing talent is always very important. Any business is only as good as the people who lead it. It is not only important to just attract talent, but to retain it and constantly create a work environment, which is conducive to personal and professional growth. This is fairly easy to gauge. Any great company is a breeding ground for talent and industry should be filled by people who have started and built their careers in these companies.
E. Balance sheet balance: Leverage can be a boon as well as bane. All great businesses are built on the foundation of a strong and light balance sheet, which are ideally free, or as low as possible. When the business cycle goes in to a downturn, it is businesses with strong balance sheets that survive and thrive.
At "Coffee Can" we say, history is a mirror into the future. The way businesses have performed in the past, is the way they are likely to behave in the future as well. So invest for growth, steadiness and consistency, and don't fall for the value trap. A strong portfolio of leaders, long term and low churn is the ideal way to make money in equities.
(The author is Fund Manager - Coffee Can PMS at Ambit Asset Management.)
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