The firm that was founded in 1969 is relatively unknown in Australia. It’s hoping to change that as it seeks to build its presence and attract the attention of the nation’s superannuation funds.
While inflation may hurt bonds, within the equities team, Baribeau isn’t letting inflation fears spook him out of owning tech stocks.
As the Federal Reserve’s posture has become more hawkish, long-term bond yields have come screaming back in – the 10-year rate that peaked at 1.6 per cent is now retraced to 1.35 per cent.
“The markets are giving the central banks a lot of credit for being on the case,” he says.
Baribeau believes inflation is indeed transitory. Demand recovered faster than supply, and that creating bottlenecks will ultimately be resolved.
Even so, he says growth companies are better placed to deal with inflation pressures should they occur.
“A growth company that has very high return on invested capital, especially incremental, free cash flow generation, can weather many storms better than the average company.
“That’s really not talked about a lot. But it is actually a really important competitive advantage for any business.”
New age consumer stocks
A big theme of Baribeau’s – and Jennison’s – is to find the best direct-to-consumer businesses and platforms that enable brands to effectively distribute their products. They include Shopify, which is one of the fund’s favourite investment ideas.
“Big brands have no experience selling directly, so will use technology platforms like Shopify,” he says.
He also favours brands that have built their own direct-to-consumer channels such as luxury conglomerate LVMH.
“You can only buy the Louis Vuitton brand through their stores or through their website. So they control distribution, they can control the pricing and inventory. They can move inventories around the world, wherever demand is showing up.
“That kind of control gives them a huge advantage over a brand that doesn’t control their own distribution. It’s not just ecommerce. It’s a whole business model shift that defines success or failure in the marketplace.”
Baribeau is particularly enthused by the fast-growing digital payments space, which he says has “come out of nowhere and is going to be a big growth story for years to come”.
In that sector, he favours two ecommerce platforms that have expanded to offer payments.
One is Shopify. Baribeau says Shop Pay is preferred by merchants while giant platforms Google and Facebook are partnering with it because it leads to a higher conversion of sales.
The other is MercadoLibre, the Latin American ecommerce platform that he says is the most successful outside of China. E-commerce is in its early stages in Latin America, which he says gives the firm a “huge runway for growth for years to come”.
Another sector favoured by Baribeau is enterprise software, where he says a “tectonic shift is under way” amid a shift to cloud-based systems.
We want them to make the land grab if the incremental free cash flow margins are high and they believe the future market share will go up.
— Mark Baribeau
“The boom in unified communication was pulled forward by the pandemic because it was necessary. But now that the foundation exists, we think it’s going to be one of the biggest growth areas.
In that sector, two stocks he likes, which were among the biggest COVID-19 winners, are Zoom and DocuSign.
Jennison is also a believer in the market’s most divisive growth stock – Elon Musk’s Tesla.
Baribeau says Tesla’s valuation is much easier to understand on a three- to five-year view, taking into account production and expansion plans that are already in place.
“We assume they sell out every car that they can manufacture, which so far has been the case. There’s no demand problem.
“So if you look out a few years following their capacity expansion, their revenues should quintuple from $US30 billion to $US250 billion in 2024.
“Then it’s a very profitable company because electric vehicles are cheaper to make than combustion engines. So they have higher gross margins.”
Add to that the trend in falling battery costs, which is the most expensive part in production, and Tesla’s valuation of 35 to 40 times 2024 profits “is not unreasonable for a company that has that growth profile”.
Investing in Tesla does put a lot of faith in the future. But Baribeau says faith in the management team to “adeptly manage capital and direct to drive future growth” is crucial in picking growth stocks.
“You’re really betting with the management team. If we like them we cut them a lot of slack if they say they’re spending heavily to generate a lot of free cash flow [in the future] and the unit economics are good.
“We’re all for that. We want them to make the land grab if the incremental free cash flow margins are high and they believe the future market share will go up.”
When to hold and when to fold
That sums up Netflix, which once divided the market but is now in the “comfortable stable category” of stocks.
The other art of growth investing is knowing when to hold and when to fold. That’s not obvious as some of the largest companies in the world have been able to maintain and, in some cases, accelerate growth.
“It really depends on whether or not that successful growth company can continue to reinvent itself in terms of driving a new stream of revenue that it didn’t have previously,” he says,
Amazon is the poster child for continuing to grow even as it became enormous. The company was a leader in ecommerce but successfully built a hugely profitable cloud business out of nothing and has once again extended its next leg of growth by adding an advertising unit.
If a company can “continue to layer on these additional verticals on their platform that drive future growth, you can continue to own the stock in size”, he says.
“But the minute it starts to mature, and there really is no second act, you do have to start to take profits and move on to the next emerging growth area of the market.
“Successful growth investing is all about that migration. It’s selling the maturing growth stories, identifying where the new leadership is emerging.”
*The author owns shares in Amazon, Shopify and MercadoLibre.