Growth Investing Is A Fool’s Game…

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As a growth investor, the last month has been one of mixed feelings. The market overall has gained and some old warhorses have seen their stocks rise. Yet, the fact is, as we waded our way through reporting season many of the markets ‘best’ growth stocks have crumbled.

Dominoes is down 20% from its highs.

Isentia down near 40% from its highs.

Aconex is down nearly 50% from its highs.

Over the last month the list has grown. And grown. And grown.

The commentary is near identical. The first half has been tougher than we thought to generate sales growth. More competition. More competitive pricing behaviour squeezing margins. Delayed purchasing decisions.

All of that sounds like normal business me. It happens. Sales growth is never linear yet market analysts always seem surprised and this surprise means investors get the jitters. We are taught, as investors, to be pessimistic. “Growth is too good to be true”.

Well no one goes into business with an intention of not growing their revenue. But, business happens.

When we look at a business we focus on a 3-5 year horizon. Our timing isn’t perfect. But we fundamentally believe in the story.

Take Isentia. We have a company that provides market intelligence to almost every major company in the country. A new business, that generates just 7% of its revenue underperforms. The rest of the business performed in line with expectations.

Today we have seen Sirtex (ASX: SRX), a company that provides target liver-cancer treatment plummet 45%. Yesterday the company had price targets of $40 and traded around $26 (having recently been as high as $35). Today, $13. It announced sales below expectations and estimated final year sales growth of 5-11%. Well under last years 16% growth. More disappointing was a forecast fall in EBITDA of 12% versus last year.

Now SRX is as much about the future growth through its R&D program so this could be a massive over-reaction but on the back of consistent “tough first half” results it gets the market nervous.

Still, if its R&D program bears fruit this price will probably look very cheap but it doesn’t make it any less painful – for any shareholder of the companies that are struggling (even the likes of CSL & Ramsay Health are down 20%).

And so, I remind you that growth isn’t linear. Execution of business strategy is never smooth. Road bumps and pot-holes are par-for-course. And amongst that knee jerk reactions are your worst enemy. If the picture has changed then maybe it’s time to sell but if it’s the same picture and the same possibilities jumping ship on a tough period can (and often will be) your worst decision.

Investing for growth and above-average market returns requires patience and the strength to hang on when your initial reaction is “what the hell!”. These are the times of opportunity.

By: Nick Rundle

Email: nmr@accession3.com

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