One of the great opportunities in recent times

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Volatility is part and parcel of investing in markets. Why then do investors absolutely panic when volatility hits their winning play? In this video, Nick Griffin, head of investment at Munro Partners talks about the cycles of re-rating and de-rating as they played out in Amazon holdings. In the end, he says, it's earnings that really matter and when you're on to a winner you shouldn't get blown over by the fears of the day.  

Instead, investors should focus on those long term trends that are going to keep the stock's value intact and deliver better results. Griffin calls out Cloud Computing as one sector facing short term pressure as expectations of a COVID free world take hold. In this short video, Griffin explains why this presents a compelling long term opportunity and shares three companies that he thinks look attractive.

 

Edited transcript:

Can you explain why earnings are so important to your process?

I think the best example I could give over the years is Amazon. As a company, it's our number one performing stock in our entire time at Munro and it's a company that's taught us a lot. But when we found Amazon, Amazon used to earn roughly $7 billion in EBITDA that year - in 2014 - which was what it was estimated to earn in 2015. $7 billion EBITDA. 

By 2020, as we look into next year, we think Amazon is going to win $70 billion in EBITDA. So, $7 billion to $70 billion, and its share price has gone up effectively 10 times over that timeframe. And so the company has perfectly tracked its earnings over that timeframe.

When we bought Amazon, we were paying roughly 22 to 23 times EBITDA for it. Over time today, we're still paying 22 to 23 times EBITDA for it. But over time it has re-rated and de-rated and re-rated and de-rated, and there's a good chart in our deck if you want to look at it. (See below).

Source: Supplied.

And so the simple thing we'd want to leave investors with is:

 Amazon was the winner of e-commerce and cloud computing. So why would you sell your Amazon because you're worried about inflation? Why would you sell your Amazon because you're worried about something Donald Trump says? 

All it does is create these re-ratings and de-ratings of the stock price over the journey. But in the end, it's the earnings growth that actually drives it over the long term.

And so as we sit here today, the latest episode is we're worried about inflation. Inflation is going to change the re-rating or the de-rating of Amazon. And yes, it will change the price we pay, but it won't change the fact that Amazon's earnings will continue to grow in the future, and in the long run, we expect their share price to follow their earnings and ultimately deliver the returns that we're looking for.

Which sectors are experiencing short term pressure but remain attractive long term?

The one area that I'm surprised has been a bit thrown out in this last rotation is really the cloud computing stocks. It's one of the bigger areas in our fund today. They don't look optically cheap, but on cashflow metrics, they actually are not as expensive as what people think. There's been this assumption, and it's very much coming from the Northern hemisphere, that COVID's going to go away and we're all going to go back to work. 

And so we have these quite amusing conversations with our Northern hemisphere colleagues, where they say, as soon as COVID goes away, we're going to go back to work and we're not going to spend any money on this work-from-home stuff anymore. And we can say, look, we're calling you from the future here. We're here in Australia, there's no COVID and no one's going back to work. Work-from-home is somewhat here to stay. The digital transformation got accelerated by COVID and there's no reason to think it will slow down just because COVID goes away.

And so from that point of view, when we look at a lot of these cloud computing software names that have sort of been thrown out in this recent rotation, that's ultimately an opportunity to invest in some of the big winners in the next decade, because it's fairly clear that a lot of these software solutions we're using for it, whether it be Zoom or DocuSign or Atlassian products are going to be with us for a long time. And ultimately that's one of the great opportunities we've seen come up in recent times.

Want to learn more?

Munro focuses on identifying and investing in companies that have the potential to grow at a faster rate and on a more sustainable basis than the peer group. To find out more, visit the Munro Global Growth Fund Profile or their website.

This is the final of three-part expert insights shoot with Nick Griffin. 

Check out the first episode where he reveals an opportunity "as big as the internet" that people haven't caught on yet.  

Or the second episode, where Nick reveals one window of opportunity for growth stocks right now.

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