Accelerators are perhaps the most perfect of investments. These are not only growth stocks but stocks that are growing faster and faster.
So to unpack this further a company may have grown by ten percent in its first year of operation, twenty percent in its second year and thirty percent in the third.
The impact of this growth rate on earnings per share is astounding, compounding year after year. If the rate of growth is unanticipated or not reflected in the share price, these stocks will make fantastic investments.
City Lodge is a classic example. It started something like this. Year one, one hotel, year two, two hotels, year three, four hotels, year four, eight hotels. You get the idea. This is investor nirvana and is exactly what you should be looking for. Situations like this do not come around often but when they do, grab them with both hands.
Accelerators must have a high current growth rate of say thirty percent a year. This is a nice level but it can be higher.
But now even more importantly, the previous rate of growth must be lower at say twenty percent a year.
The current rate of growth therefore of thirty percent represents an increase of fifty percent on the previous rate of growth of twenty percent.
This share therefore now meets the vital condition of accelerating earnings growth.
If these conditions are met investors can expect the share price to perform most satisfactorily, especially if the earnings acceleration is not anticipated by the market and therefore not reflected in share price appreciation. So investors need to look out for increased activity as this may indicate an advance in profits – it is even better to anticipate the increase in activity. An increase in contracts, market share, geographical expansion, new products, new licenses or patents, increased prices or a large decrease in costs are just some examples of underlying conditions that can lead to increased earnings.
As the year ends, investors are confronted with an unprecedented deflationary spiral. This has profound investment implications. One such implication is a surge in the value of true growth stocks. These shares are a Christmas gift that will last for years to come.
“I wish all our readers a blessed, peaceful and prosperous new year.”