Why conditions are turning for growth investing and 3 stocks to consider

After a strong period of outperformance against other investment styles (namely value), "growth" investing was rocked in 2022 amid surging inflation and, more specifically, higher interest rates. 

We all know, however, that things can and do change - often quite quickly these days. There is already discussion about interest rates coming down in 2024, despite both the Fed and RBA hiking at the most recent meetings. 

James Tsinidis, Portfolio Manager of the Munro Climate Change Leaders Fund, believes that bond yields and rates have peaked and that will be beneficial for growth investing moving forward. 

"That's a really good thing for growth investing because it just means that your PE multiple, your EBITDA multiple is at least steady or holding, and it's not falling".

According to Tsinidis, this means that growth investors can get back to focusing on finding earnings growth and finding companies that are growing faster than the market expects. 

"It's a welcome sign that rates have peaked and we can get back to just following the fundamentals of the companies".

In the following interview, Tsinidis talks about why interest rates are so important for growth investing, the massive opportunity that is climate investing and how Munro breaks down that market, and a couple of stocks he likes right now. 

Please note: This interview took place on 26 April 2023.

Edited Transcript

2022 was a difficult year for all growth investing. Thankfully, in '23, things seem a little calmer. It looks like bond yields have peaked, rates have peaked, and inflation is coming down. That's actually been the key debate through 2022 and into 2023. 

At Munro, we have the view that bond yields have peaked, rates have peaked. That's a really good thing for growth investing because it just means that your PE multiple, your EBITDA multiple is at least steady or holding, and it's not falling. 

You can let the earnings growth of the company start to come through. As a growth investor, that's our whole job, finding earnings growth and finding companies that are growing faster than the market expects. From that perspective, it's a welcome sign that rates have peaked and we can get back to just following the fundamentals of the companies.

Rates are important to the process from the perspective of, particularly, the higher-multiple companies. 

I should point out that growth doesn't just come from high-multiple companies. Usually, high-multiple companies have much higher growth rates than low-multiple companies, but you can also buy growth in low-multiple companies as well. 

There's numerous examples across the climate space where you can actually buy growth at low-multiples. That's what we've had to really do over the past 12, 18 months as you've been in this uncertain bond yield environment. We've had to actually move away from those really high-growth stocks, with limited earnings today, and trading at high-multiples, and basically pivot back to stocks at more reasonable valuation models, but where you could still get growth. 

The reason you can still get growth in the climate space is because the whole space is growing, because it's supported by government tailwinds, in terms of government programs. It's supported by corporate spending, as well, to decarbonise their operations, as well as, obviously, the investor bases as well.

What are the four sub-sectors Munro focuses on and why have you broken the opportunity down this way?

It's about $50 trillion of spending going to decarbonisation. What we do a lot as growth investors is we look at TAMs (total addressable markets). In the internet era, you had a big TAM of potential global advertising spend, and how much of that was going to go online, and basically what was going to be the TAM opportunity for companies like Facebook, Google, etc.

Climate is no different. 

We look at this $50 trillion TAM, and then we try to figure out where the money's going to be spent. To do that, initially, we looked at the European Investment Bank and their expectations for where the money would be spent. Per their expectations, about a quarter of it was going to go to energy efficiency. Again, that's retrofitting buildings like the one we're in today, and heating, cooling, etc - big source of emissions. 

About 20% or so was going to go to energy transition, to green energy, away from coal and gas, obviously. Another 20% or so was going to go to EVs and so forth.

Grouping all that together as we got up to 100% of their pie chart, we basically figured out that it was following four key thematics, and we basically mapped our universe off the back of that spending growth - following the money. 

Again, 25% to energy efficiency, that's looking at these industrial companies that are helping us be more efficient. 25% to EVs and clean transportation. 25% to clean energy. Then, the last piece that we identified was 25% or so to what we term "circular economy", which is a bit more of a catchall, and it's basically reusing what we have today a bit more effectively so it puts less of a strain on the environment. 

Can you crystallise the prior discussion into some stock opportunities?

I think the big thing starting off in 2023 has been looking at the EV side, because of those four sub-segments, I'd say that's the one that's really hitting its inflection curve at the start of 2023.

The reason the S-curve is inflecting when we talk about penetration of EVs versus internal combustion engines, is because there are actually price cuts in the market. It actually makes it more attractive for us as consumers to go and buy an EV, as opposed to an internal combustion engine car. Those price cuts have been led by Tesla (NASDAQ: TSLA), obviously, who have been cutting price a lot to pull this curve to the left. That's been a big data point we've been watching. It's not necessarily bullish for Tesla's earnings in the short term because they're obviously selling their product at a lower price. They make less margin, but it's good for the whole sector, longer term. 

There's a whole bunch of different companies out there in the EV space that benefit from this, that aren't necessarily the company cutting their price, being Tesla.

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