Explosive growth ideas and how to find them
It's an investor's sweetest dream. To have tapped into Netflix ten years ago when it was only US$20 per share and is now at circa US$500. Or Amazon, even at the peak of dot-com, when it was trading at US$70-80, rather than US$3000 today. Imagine.
You're often taught to invest in high (or indeed explosive) growth stocks when you're young - because you have the time and the risk appetite to do so. High growth is a volatile ride, and it takes guts to play the game.
Guts, and time.
Managing director at Frazis Capital Partners, Michael Frazis, has these qualities in spades. He has a fearless approach to investing saw his returns hit over 100% after fees through the COVID-19 period.
He learned early on that shorting and hedging wouldn't work for the kind of fund he wanted to run. He turned the fund long-only, and he's stayed optimistic about the long term growth of these companies ever since.
"Things like Tesla, Afterpay, Netflix ... Software companies that didn't exist 10 years ago are now worth tens or hundreds of billions of dollars," he said.
"We're trying to figure out how can you actually identify those things early? What characteristics do those companies have right at the beginning of their journey - or relatively early in the journey - that could allow you to identify them, and then invest in them, and then hold them the whole way through?" said Frazis.
That is the crux of Frazis' entire investment philosophy and he calls it "true love and explosive growth". I wanted to explore the idea behind this strategy and understand how to capture some of that growth. But the biggest stand out was Frazis so-called "spicy" stock example.
So, how do you find true love and explosive growth (and measure it)?
The economics of "true love" is irrational and understandably you have to go to great lengths to find it.
"A charming CEO that you trust doesn't necessarily translate into whether people buying or selling a particular product," argues Frazis.
"I think a lot of fund managers talk a lot about access to management and the kind of insight you can get in speaking one-on-one with a CEO, but obviously you're not actually allowed to get any real information from those meetings," he said.
Instead his measures the unmeasurable through a range of obscure techniques. From the lines out the door of an Apple store, SER (search engine ranking) trends, whether people are tweeting about a company or posting about it on Instagram. He will even speak to former employees of a company or its suppliers to try and gauge the sentiment there.
Frazis is tapped into the zeitgeist. He has to be in order to track consumer love.
He doesn't have a secret sauce or proprietary recipe. He said while it's possible to pay for data sweepers and scrapers, the information you can get online, free of charge, is pretty good. But he warns about data overload.
"What you don't want to be doing is competing at the margins," he said.
In the video above, he cites an example of weekly data coming from Carvana, a company he has been invested in since 2019.
Frazis reports frequently on his holdings and on "growth" stocks more broadly. Source: Frazis Capital Partners.
"People started gaming that (data). Every week, when it came out, the market would move. So people started replicating that and trying to trade ahead of that. And that's precisely the sort of race we want to avoid," he said.
Oh. And don't forget, love isn't enough - the company has to be growing at a rapid rate as well.
"There's that explosive growth element as well ... Our companies are growing at well over 100% on average. We'll hold them while they continue to do that because the real returns come from compounding that over two, three, four, five years," he said.
This means that there has to be actual revenue and this distinction is most apparent when you look at the kind of companies he does and doesn't invest in. He's not interested in being Australia's Cathie Wood, the US-based investor who is renowned for her bullish (and accurate) position on Tesla.
It's an easy comparison to make, but Frazis' key distinction is timing.
"I'd say what we do differently is: Cathie Wood seems quite interested in investing in almost anything that is innovation-focused, a lot of things that sound really good but are a bit further away from actually delivery," he said.
Frazis' growth winners and a "spicy" stock holding
Frazis is relatively sector agnostic, with investments in life sciences, e-commerce and innovation. He will go where the growth lies.
Source: Frazis Capital Partners.
As at 31 March, he listed Tesla, MercadoLibre, Twilio, and the list goes on. He holds about 30-50 stocks at any given time, so the list below is not exclusive. In fact, he wrote, "the fund itself performed better than the stocks above, which was partly due to some fortunately timed exits of richly valued companies, but mostly due to new positions which shielded the blow".
But there's one stock he mentioned in the video above which really captures the imagination and the vision behind "true love and explosive growth".
"There's a couple of interesting companies that we are looking at. They're quite spicy," he said, meaning controversial or provocative.
"I wouldn't recommend anybody goes out buys them ...(they are) exchanges in Asia that are building social communities around trading. Think about the Reddit phenomenon in the US there are companies in, effectively, China that are building communities, encouraging people to trade ... one of them came out with 350% revenue growth," he said.
I can't speak to this mystery stock, but rather to the concept itself. Reddit has been a source of constant IPO speculation, and at its most recent fund raising round was valued at about US$6 billion. Meanwhile, retail trading platform, Robinhood's pre-IPO speculations has swung between a US$40 billion valuation and a mere US$11 billion. Retail trades have spiked in the past year and now make up a quarter of all trades, according to the Financial Times.
I can't imagine a more provocative stock than a combination of Reddit and Robinhood. In this new age of retail investors fuelled by social media "communities" like Reddit, the investing power and capital behind these dual-engines is formidable. There is undeniably a force (perhaps an aggression rather than love) driving consumer attachment to these kinds of companies.
Time well spent
In a world where track record is everything, it's unavoidable to dodge around the question of Frazis' early stage in his career. As a fund manager in his early 30s, I wondered if this was sometimes more hindrance than a help.
"If you go into a meeting and a young person rocks up, it could go either way. On the one hand, they've got less experience than a lot of other people. On the other hand, it's probably a bit more exciting, a bit more interesting," he said.
"Most fund managers are investing in a very similar way. Using these same tools, they're coming to the same answers around these core stocks," he said.
No doubt some recognition is given to the family name. Frazis' father, George Frazis is CEO of Bank of Queensland, former CEO of Westpac and of St George. Frazis Snr co-invests in the fund.
But largely, Frazis said his father's heaviest impact on his career to date has been impressing on him the importance of performance: "the better you deliver, the better you are" is a tough mantra to live by.
"He particularly is very focused on education. He's pretty demanding around performance ... it's actually how he looks at business as well. You know, you should be performing. You need to hit your numbers," he said of his father.
Frazis might have finance in the blood, but his passion for science and innovation is still strong. He studied Chemistry at Oxford University and has a Masters of Finance from the London School of Economics.
It gives him a distinctive edge. He doesn't shy away from giving investor-friendly explanations of the difference between mRNA and RNAi and how this could apply to an investment case for Moderna, for example.
"I wouldn't necessarily suggest anybody makes that jump" from science to the "dark side in finance", he joked.
"There's so much cool stuff going on in there."
But with his stock-picking ability, no doubt his investors are glad he made the leap.
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Mia Kwok is a former content editor at Livewire Markets. Mia has extensive experience in media and communications for business, financial services and policy. Mia has written for and edited several business and finance publications, such as...