Super Stocks: How to Identify the Best Growth Companies

Some of you may already be familiar with Super Stocks, as I have shared more about how to identify them in my investing class, and even provided a whole list of them for my GIM Community.

But for those of you who are hearing about it for the first time – I hope you’ve prepared a notebook.

There will be plenty of information here that will propel you forward in your investing journey, so be prepared to deploy this information in the fastest time possible for the best results!

But First, The Problems With Investing in Blue Chips

In my earlier days, I was investing in average companies.

For example, some of the companies I invested in was Disney, Johnson & Johnson, and Walmart.

While they were good companies, they failed terribly under the Rule of 72.

So what is the Rule of 72?

It’s defined as a rule of thumb used to estimate the number of years required to double any investments.

For example, if a company is growing at 3% per year, it takes almost 24 years (72/30) for the company to double its profits. On the other hand, if a company grows at 10% instead, it takes almost 7.2 years (72/10).

As growth investors, the goal is to maximise returns on the time and effort spent. I’m not helping myself by choosing low growth companies. Instead, my goal is to double my portfolio every 2 – 3 years. This means my portfolio has to grow more than 30% every year.

(RE: The Hedgehog Portfolio Hits S$500k!)

This is why I do not invest in any companies that report low growth rates. Time is precious, and we need to know that we deserve better companies in our portfolios.

Faced with this challenge, I learned to pick up high growers such as Hypebeast, which grew its revenue by 51% compounded growth rate for the past 3 years. During this period, I made close to three times my money on Hypebeast as its business became more valuable.

However, while I have made profits off these companies, there were a lot of inherent issues.

(RE: How did Hypebeast (SEHK:0150) Perform?)

Hypebeast is a digital advertising agency, but it cannot scale very quickly because creativity cannot be manufactured. Both inspiration and drafting time are needed for their creative directors to plan out advertisements for their clients. Once it hits a saturation point, the growth slowed down considerably.

It is similar to a restaurant where certain dishes have to be cooked by a particular chef, while the chef has only two hands and limited time. This puts a limit to how many dishes could push out. Don’t you agree?

Eventually, I sold out of Hypebeast as well.

Then… I chanced upon a new breed of companies which I call Super Stocks.

So…What Exactly Are Super Stocks?

Let’s start by summarising quickly what growth stocks are. Growth stocks are essentially companies which tend to grow quickly and, in turn deliver outsized returns to their investors.

While these are great companies to invest in, there is a special, smaller group of stocks within the large umbrella of growth stocks, called Super Stocks that can accelerate your portfolio growth even more.

Super Stocks are early-stage, highly disruptive, innovative companies. They have low market capitalization and tend to disrupt or change the way the industry works. For example, before Netflix became popular, many consumers were still renting DVDs from Blockbuster.

However, once Netflix became the new standard for movies. Value migration took place and Blockbuster became a victim of it.

What’s value migration? According to Adrian Slywotzky, it’s a flow of economic flow from obsolete business models to businesses that provide better value propositions to their customers.

Imagine disrupting an entire old industry and stealing away existing market shares. The result is a new emerging player that would report very rapid revenue growth rates for sustainable periods of time.

Whether we like it or not, humans are always looking for more efficient methods of workflows and a higher quality of life.

As such, Super Stocks are companies that produce new technologies to turn possibilities into realities.

We have shifted from newspaper to digital social media.

On-premise servers to cloud databases.

Petrol/diesel to electric cars.

Offline retail to online retail (e-commerce).

Banks to FinTech

… the list goes on.

At the start of every adoption (green arrow below), the growth rate is high and the runway for growth could be for multiple years. For example, e-commerce and software are industries that are still severely under-penetrated.

Most investors are very comfortable investing in established companies because they are deemed as safe businesses (see the red arrow).

However, when the force of disruptions happens, profits might disappear quickly. On a valuation basis, that same cheap company can become expensive in an instance.

Contrary to popular belief, established companies are the riskiest because they are most vulnerable to fierce competition from newer players. This is especially true because we’re living in a world with accelerated development and adoption of technology.

It is also harder for established players to compete because it involves the entire overhaul of both their mindset and product lines. As a result, some of their top management could be uncomfortable with the idea and refuse to take the swift action necessary to change.

Some victims of value migration include Singapore Press Holdings, Nokia, Sears, Blackberry, and Ford, etc.

For everyone who’s reading, this might sting a little, but it is necessary to be said:

If you are doing what everyone is doing, you are going to get results like everyone else.

If you are looking at companies that no one is looking at, you’re going to get amazing results.

Do what other people are not doing. Remove all the average companies and focus on Superstocks.

If you have not heard about companies like Celcius Holdings, XPEL, eXp Realty, Roku and Pacific Biosciences, you’re missing out.

These are future game-changers, not your traditional companies like Intel, McDonald’s, Coco-Cola, etc.

Example of a Super Stock – XPEL

Not convinced? Let me share an example with you.

Based in Canada, XPEL is the leader in protective films. For example, car owners would purchase XPEL’s UltimatePlus paint protection film to protect their car paint. In comparison with other competitors, XPEL fares well in scratch protection.

When cars go off-road, there is a high chance of getting stubborn mud stains or scratches from rocks hitting the car’s body. These things are problematic for car owners especially when it makes a repaint necessary.

With XPEL, such problems go away. Think of it as a giant “screen protector” for the car. This resolves a huge pain point for car owners, and most don’t mind shelling out $4,000 – $6,000 to maintain the pristine outer condition of the car.

As the product sells itself through word-of-mouth, XPEL does not incur huge sales and marketing costs and it grew on an average of 33.2% CAGR for the past few years.

Along with multiple valuation expansions, XPEL returned almost 32x from 2018 to 2021.

I hope this helps you to see how small companies like XPEL can actually be Super Stocks. You have to focus on small businesses with a unique value proposition that is disrupting the current norms of the business aggressively.

Some Ways to Identify Super Stocks

1. Scalable Business Model

Sometimes, the choice of the business model determines how much and how easy it is for a business to make money. Super Stocks always find it easy to scale and produce growing profits, therefore, becoming more valuable within a short period of time.

2. Customer-Centric Management

For management teams of Super Stocks, they are not trying to extract the last dollar from their customers. Instead, they choose to take customer feedback into their product research and development process.

They are customer-centric and focused on their mission of delivering greater value to their customers. When new products are released, it tends to have product-market fit and gains popularity quickly.

The formula for Profit is “volume x profit margins”. Most companies are focusing on optimizing the profit margins while CEOs of Super Stocks are focusing on volume.

One such example is Costco, which used to be a Super Stock – but it’s a big company now.

Whenever they got cheaper prices from their suppliers, they would pass down the savings down to their customers.

Costco could have kept the discounts and enlarged its own profits pool. Instead, they refused because they understood that repeat sales and volume were key to long term success. They did not harvest profits excessively as they are focusing on longevity, and that stopped new competitors for many decades.  

CEOs of Super Stocks are short term ignorant and long term greedy.

If they choose profit margins over volume, it makes their business vulnerable to another competitor who is willing to operate at a lower profit margin. A CEO should focus on scale in the beginning and optimize profit margins only when the market has matured.

Summary

Finding a Super Stock is often difficult. You have to dig through several companies to find exceptional qualities in them.

However, once you have found one and conducted your due diligence, the remaining action you need to do is nothing. Sit tight and watch your wealth compound over time.

1. Super Stocks are early-stage, highly disruptive, and innovative companies.
2. They provide a huge value proposition to their customers through their products and services.
3. Super Stocks are companies that produce new technologies to turn possibilities into realities.
4. They usually have small market capitalizations.
5. CEOs of Super Stocks practice delayed gratification in order to ensure total dominance.

Invest in mediocre stocks and stay average; or invest in Super Stocks and supercharge your portfolio.

I hope my article has benefitted you. If it has, please pay it forward by sharing it with more people!

By the way, feel free to also check out my Growth Investing Secrets Podcast on Apple Podcast and Spotify for more FREE investing resources!