Thursday, May 31st, 2007
Growth investing guru Michael Moe’s 10 rules on finding the next Starbucks
I haven’t read Michael Moe’s book Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow, but I’m planning to soon.
I have read his site www.findingthenextstarbucks.com. It has interesting features, most notably some great interviews with growth investors, including Richard Driehaus. It requires a simple registration to access the stories but they are worth reading.
For more information on Moe, who was director of global growth stock research at Merrill Lynch, check out the site for ThinkEquity Partners, the investment company he went on to found.
The site includes an interesting growth index and a blog.
This blog entry Star System outlines Moe’s strategy for finding growth stocks, which he dubs a “recipe book”.
His strategy begins with the Think 10 Commandments, then moves to “megatrend analysis”, followed by evaluation of a company’s “four P’s” and some valuation criteria.
The 10 Commandments are:
1. Be right on the fundamentals
Earnings growth drives stock price. There is essentially a 100% correlation with how a company does and how its stock performs over time.
2. Be Proactive — Not Reactive
Reporting what happened is what a news reporter does. We get paid to look over the horizon and around corners.
3. When in Doubt — Get it Out
The difference between value-added information and a commodity could be minutes.
4. When Wrong — Admit it
The best investors and analysts are wrong a lot. The worst thing to do is rationalize a mistake. Be intellectually and morally honest.
5. The Cockroach Theory
You seldom find just one cockroach in a kitchen. Likewise, if you find a problem at a growth company, there are always more behind it. It’s rarely a one-quarter issue — the first loss is the best loss.
6. Research is About Information and Insight
Information is valuable if it is proprietary. Insight is valuable if we know what that information means.
7. The 4 P’s are Key for any Successful Growth Company
People, Product, Potential, Predictability. The first “P” (people) is the most important.
8. 5 Independent Sources for Each Initiation of Coverage
We will have regular dialogue with company management, but they will always see the glass as “half full.”
9. 3 Main Reasons for a Stock to Move Up or Down
In addition, we will identify near term catalysts for price movements.
10. Make Clients Money — and everything will take care of itself
Our investment philosophy is that over time, revenue and earnings growth is what drives company valuations. Our ultimate goal is to identify companies that have high and sustainable earnings growth.
Moe looks at companies within themes he’s identified, then ranks them using the four Ps (listed above). He then values companies based on earnings growth and PE ratios “to determine near-term attractiveness.”
“The reality is that at any given time, there are great companies selling at bad valuations that create near-term risk, as well as bad companies selling at compelling valuations that create near-term opportunities,” he said.
As you can see it’s a rigorous process. For Moe, finding growth stocks isn’t as simple as sipping coffee in your favourite coffee shop and deciding it’s a great company!
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