The very best disruptor stocks often exhibit all five⦠[RiskHedge Report] [Chris Wood]
Five guideposts that point to great disruptors By Chris Wood - RiskHedge Do your disruptor stocks pass the âgrowth test?â... The key to Googleâs success... Why I look for âskin in the gameâ... Editorâs note: If youâre serious about disruption investing, you cannot ignore todayâs essay. In it, Chief Investment Officer Chris Wood breaks down five clues that point to great disruptor stocks. Think of these as financial guideposts. The most profitable disruptor stocks usually meet at least three or four of these criteria. The very best often exhibit all five... *** - Great disruptors grow⦠and grow⦠and grow. Every disruptor must pass the âgrowth test.â It must grow revenue year after year after year. Consistency is key. Companies that grow quickly, and then stagnate, can make for good trades. They can earn you a quick buck if you sell at the right time. My goal in my Disruption Investor advisory is to help you build lasting wealth. To accomplish that, we fill our portfolio with disruptors that can achieve sustained revenue growth. I like to see revenue grow of at least 20% per year. Disruptors that grow at this pace often reward shareholders with big profits. Amazon (AMZN) is a classic example. For over 20 years, the online giant found new ways to grow⦠and grow⦠and grow. In fact, in a 16-consecutive-year span, Amazon grew revenue by at least 20% per year. Thatâs an astounding accomplishment. Over time, Amazonâs consistent yearly growth snowballed. During that 16-year span, Amazonâs sales exploded more than 5,000%! This led to early investors collecting profits of more than 200,000%, accounting for splits. - Great disruptors make heaps of cash. So, youâve found a disruptor that grows consistently. The next question you must ask: Can it turn growth into profits? Youâd be surprised at how many growing companies have no hope of ever turning a profit. Generating a billion dollars in sales is great. But if you spend $1.1 billion to get there, thereâs a good chance your business isnât viable. Some unprofitable companies can survive for years on pep talks from a charismatic CEO. But, eventually, math always wins out. One of the best measures of profitability is net profit margin. In short, net profit margin tells you the profits a company keeps for every dollar of sales. A 20% net profit margin means it turns every dollar of sales into $0.20 of profit. Companies with strong and growing profit margins hold a key advantage: They can reinvest that cash back into the business to keep growing. Take Google (GOOGL), for example. It dominates internet searches, which is a high-margin business. For every dollar its core search business generates, it keeps more than 20% as profit. This keeps a constant stream of new cash flowing into its coffers. It has used much of this cash to develop and acquire disruptive projects. For example, Google has plowed billions of dollars into its self-driving car subsidiary Waymo. Waymo is far and away the world leader in self-driving car technology. Waymo cars have driven more driverless miles than all other competitors combined. Google has plowed well over $5 billion into Waymo. Few companies on Earth have the ability to do this without borrowing gobs of money. I expect Googleâs investment in Waymo to eventually pay off big time as self-driving cars go mainstream. Google also owns YouTubeâthe second most-viewed website on Earth. The #1 most-viewed website on Earth, by the way, is Googleâs search engine. Google has also made investments in disruptive sectors like artificial intelligence and quantum computing. None of this would have been possible were it not for the profit engine at Googleâs core. Its strong margins give Google the opportunity to make disruptive investments that could pay off tenfold down the road. Now, the truth is, a stock isnât necessarily a bad investment because it lacks profits. Some companies, like Amazon, can go years or even decades without turning a profit. Lack of profits didnât stop Amazonâs stock from shooting to the moon. You might wonder why. In short, Amazon achieved such incredible growth that investors were OK with it not making a profit for a long time. For disruptors like this, the key is that the company has a path to profitability. The thing most analysts overlook about Amazon is it could have turned a profit long ago if it chose to. Instead, it opted to keep selling things for dirt-cheap prices to grow its customer base. This resulted in zero profits but a soaring stock price. - Plenty of skin in the game. This one isnât about financial performance. But itâs just as important. âSkin in the gameâ refers to how invested a companyâs management is in its success. When high-ranking executives like the CEO have âskin in the game,â it means their interests are aligned with shareholdersâ. Amazon founder Jeff Bezos owns around 10% of all Amazon stock. Googleâs two founders own 11% of the company. Mark Zuckerberg owns about 14% of Metaâs (formerly Facebookâs) outstanding stock. And, up until a couple of years ago, the founders of Apple (AAPL) and Microsoft (MSFT) owned huge chunks of their companies. Humans are wired to act in their own best interests. A CEO with a big part of his net worth on the line is likely to make better long-term decisions than one who is simply collecting a paycheck. Meta is a good example. When it was two years old and generating just $48 million in sales, Yahoo! offered to buy it for a billion dollars. A management team with little skin in the game would likely have taken the money and run. But founder Mark Zuckerberg had much bigger plans. Meta went on to become one of the worldâs biggest, most dominant companies. - Great disruptors break the rules. When evaluating disruptors, I do not read too much into valuation. Valuation measures how cheap or expensive a stock is. For traditional businesses, the price you pay for a stock is very important. But when it comes to disruptors, valuation metrics can often lead you to incorrect conclusions. For example, for most of the past decade, Amazon has traded at well over 100X earnings. By any traditional definition, this is absurdly expensive. The S&P 500 trades for around 22X earnings. I know many professional investors whoâve avoided Amazonâs stock because itâs âovervalued.â Theyâve missed out on Amazonâs 1,800% surge over the past 10 years. Please understand, Iâm not saying we completely ignore valuations. My team and I look at them closely. When we evaluate an expensive stock, we ask: Why is it richly valued? Is the premium deserved? If youâre evaluating a stock that has demonstrated it can grow sales 20% year after year, as Amazon has, an expensive valuation shouldnât scare you. But when a run-of-the-mill, slow-growing business is overpriced, you should usually run the other way. The simple fact is, when it comes to fast-growing disruptors, growth and profitability are far better indicators of where a stock is headed than valuation. Youâll find that most disruptive companies trade for high valuations. Markets reward companies that grow fast. Avoiding all stocks with high valuations is a mistake. It will lead you to missing out on the biggest gains. The inverse is also true. Stocks that trade for low valuations are usually cheap for a reason. For example, American carmaker General Motors (GM) trades for just 5X earnings. Some folks see that as a bargain. To me, itâs a red flag. GMâs sales havenât grown in two decades. And the stock has been dead money for the past 10 years. - Hunt for companies disrupting huge industries. The ideal disruptor is small compared to the industry itâs disrupting. The Trade Desk (TTD), a small company that disrupted online advertising, appreciated over 1,000% after we [first brought it to your attention in the RiskHedge Report](. In 2018, TTDâs sales totaled $477 million. Yet it was taking on the then $725-billion global advertising industry. As Chief Analyst Stephen McBride explained in [his 2019 follow-up RiskHedge Report on TTD](, âThe Trade Deskâs sales could soar 1,500% and it would still own less than 1% of its target market.â This gave its stock the potential to double relatively quicklyâwhich is exactly what it did in the 16 months after Stephen wrote about it. The key is from there, it still had plenty of room to triple or quadruple again. At the time, competitor Meta was more than 50X the size of The Trade Desk. And competitor Google was almost 100X its size! Which means The Trade Desk could keep growing⦠and growing⦠and growing⦠for years. Another example: [In late 2018, we alerted our readers to a company calledÂ]([Alteryx (AYX)]( [in theÂ]([RiskHedge Report](. As publicly traded companies go, Alteryx was small. It was worth just $3.7 billionâtoo small for inclusion in the S&P 500. But it was clear that it was quickly becoming a dominant player in the big and rapidly growing data analytics market. Leading research firm International Data Corporation estimated this market would be worth $81 billion in just three years. AYX surged 62% in less than four months after we recommended it. Even after that strong rally, it had plenty of room to double or triple again. Small- or medium-sized companies going after giant markets is an ideal setup. We hunt for this combination because it can lead to almost unlimited upside in the stock price of a disruptor. Chris Wood
Chief Investment Officer, RiskHedge PS: Changing gears, you should know that SIC 2023 is LIVE. And you can still [get your virtual pass for 44% off here](. If youâre not familiar, the Strategic Investment Conference (SIC) is a closed-door gathering of many of the worldâs greatest investors. This yearâs is shaping up to be the best one yet. As always, it will be full of specific, actionable investment recommendations. With your Virtual Pass, youâll receive immediate access to SIC sessions from the top minds in finance. Virtual Passes include videos, audio, and transcriptsâso even if you canât watch all the live presentations, you wonât miss a thing. If youâre interested, [go here now for details, including your big discount](. Suggested Reading... [The most important
11 words of the
AI boom](
Â
[Special Edition Interview: Inflation Is Dead
âWhat's Next?]( If someone forwarded you this email and you would like to be added to our email list to receive the RiskHedge Report every week, [simply sign up here.](
This email was sent to {EMAIL} as part of your subscription to RiskHedge Report.
To opt-out, please visit the [unsubscribe page](. [READ IMPORTANT DISCLOSURES HERE.]( YOUR USE OF THESE MATERIALS IS SUBJECT TO THE TERMS OF THESE DISCLOSURES. Copyright © 2023 RiskHedge. All Rights Reserved
RiskHedge | 1417 Sadler Road, PMB 415 | Fernandina Beach, FL 32034