Value v Growth: Good Companies vs Good Investments

From the desk of Tony Kynas­ton:

In yes­ter­days QAV pod­cast [episode 310] I men­tioned that there is a dif­fer­ence between find­ing a good com­pa­ny and find­ing a good invest­ment.

This fol­lowed on from a con­ver­sa­tion we had with Jack­son and Ricky from the Syd­ney Super­in­vestors club (com­ing up in episode 311) where I asked them for their top stock tips.

First­ly, good on these two guys for tak­ing an active inter­est in val­ue invest­ing at a young age and for being organ­ised enough to put their club togeth­er. It is a cred­it to them.

The two stocks that were nom­i­nat­ed were Seek and Cochlear. Both excel­lent com­pa­nies with bright futures.

How­ev­er, are they good val­ue invest­ments? I sus­pect that invest­ing in either com­pa­ny will make mon­ey over time, the ques­tion is will we get “super investor” style returns from buy­ing shares in these com­pa­nies?

I don’t think so, and here is why.

One of our inter­vie­wees made the com­ment that ”val­ue and growth” are joined at the hip. The prob­lem is that nei­ther val­ue or growth are present in Seek or Cochlear. They need a hip replace­ment.

Val­ue and growth have been in the past for these two stocks, very strong growth, but cur­rent­ly (and I don’t mean because of Covid19), the growth rates are down on both of these com­pa­nies.

Here are the num­bers:

COH Dec19 eps growth 0.76%
SEK Dec19 eps growth ‑28.72%

Com­pare this to Fortes­cue Met­als Group (see arti­cle) where growth was 490%.

The price-to-oper­at­ing cash­flows for these stocks based on their Dec 19 num­bers and using cur­rent prices are:

COH 47.5 times
SEK 15.13 times
FMG 3.67 times

Now I know that Fortes­cue is a cycli­cal stock and that it won’t con­tin­ue to grow for­ev­er. No tree grows to the sky. I will use my 3 point trend lines to exit this stock when nec­es­sary. I think in the case of some of the long term growth dar­lings in the mar­ket, how­ev­er, this point has been lost.

Both COH and SEK have had peri­ods of high growth about 10 years ago where there eps growth was well into the dou­ble dig­its con­sis­tent­ly. The ques­tion is, though, have they matured and do they deserve con­tin­ued high mul­ti­ples? If val­ue and growth are joined at the hip, then the answer is, No.