While the NASDAQ is still quietly recovering from last week’s pre-Fed panic attack, growth investors are still a long way from feeling great again. Confidence just doesn’t come back overnight.
But you need a little conviction to reach for the real long-term gains the stock market has proved it can supply, generation after generation. You want to find companies when they’re small and stick with them until they’re substantially bigger.
I’m not talking about what it would take to keep Microsoft (MSFT) raising the top line 15-20% a year for the foreseeable future. That’s giant math, for companies that have effectively stopped innovating.
Today’s trillion-dollar titans have a lot in common with the biggest conglomerations of the past. Their most dynamic days are behind them now. They’ve already changed the world.
So don’t expect to find the Apple (AAPL) of tomorrow among the mega-cap giants of today. Not even Tesla (TSLA) is growing fast enough to really change the world the way Big Tech did a generation ago . . . which means the odds of it transforming your portfolio in the same way aren’t high.
Now maybe a more aggressive interest rate cycle doesn’t make growth easy. When money isn’t free any more, start-up CEOs need to allocate every dollar more efficiently to achieve the same market impact.
They need to get smarter. They need to take calculated risks. And so do their shareholders. If you aren’t open to that kind of ride, stick to the established names.
But don’t let anyone tell you that kind of extended exponential growth is impossible in anything but a zero-rate world. Apple did it. Alphabet did it. Amazon did it.
And don’t take my word for it. The last time the Fed turned this hawkish was 2004, when Alphabet (GOOG) was a $23 billion IPO, Apple was only a little bigger on the good days and Amazon (AMZN) was just a $50 bookstore stock.
To get even the biggest of these companies to $1 trillion, you needed to capture roughly a 4,000% return, turning every $1 into $40 in the process.
Naturally, that kind of extended glide path doesn’t run on smoke and mirrors. Silicon Valley worked its miracles by creating entire industries and consumer categories . . . whole commercial ecosystems that changed the way we live.
But my point is that when you go back close to 20 years, these were relatively small companies then. Amazon sold books. Alphabet was a search engine. Apple made portable stereos and niche computers.
If you want an experience like what Apple shareholders have enjoyed over the past decades, you don’t buy an established world-spanning conglomerate. You find a company with an innovative product and a management team with the vision to build on it.
Buying Apple today and hoping for that 2004-2022 experience is a lot like buying GE (GE) or ExxonMobil (XOM) in 2004 . . . or, if you were feeling a little braver, Walmart (WMT), Pfizer (PFE), Intel (INTC) or Citi (C).
Add Microsoft to the list and those were the mega-cap giants of their era. They’ve done all right on the whole, but the best performer in the group (mighty MSFT) handed shareholders a 16.5% annualized return over the timeline we’re talking about.
That’s it. If you bought MSFT in 2004 and held on, you’ve booked a 1,400% return across 19 years. Better than the S&P 500, but still nothing like what you’d have if you jumped to the weakest of today’s Big Tech juggernauts back then.
And MSFT’s second act is a huge exception. The rest of the 2004 giants have rewarded shareholders almost entirely through dividends, literally sacrificing future expansion in order to boost short-term returns.
Sound familiar? That’s exactly what MSFT and AAPL do today. When Tim Cook can’t think of any way to boost sales and earnings, he buys back his own stock instead, then hands a little cash to remaining shareholders as a prize.
Not counting dividends, a company like Pfizer has returned less than 2% a year since 2004. Add the quarterly payout back in and you’ve made 6% annualized . . . trailing the S&P 500.
Intel, once feared and admired as one of the biggest tech companies of its era, has a similar growth curve to “brag” about. Chips only took the company so far before management ran out of big ideas.
Walmart and Exxon have done a little better over time, but each in their own way has hit the hard wall of big numbers. They just can’t get much bigger.
While that maturity has its advantages, it’s not really going to stay more than 4-5 percentage points ahead of inflation in the long run. That’s okay if you have decades to work with or are resigned to being as rich as you’ll ever be.
But a lot of investors who settle for safety will always be looking over their shoulder at their friends who picked Apple and Amazon and Alphabet instead back in 2004. You’re literally comparing Apples to Pfizers.
The Apples Of Tomorrow
Enough history. While there’s plenty of evidence that small stocks can grow fast enough to outperform the most aggressive Fed cycles, ambitious investors want to know where to go in the next two decades.
Start relatively small, maybe in the $10-$30 billion zone where today’s trillion-dollar giants were at this point in the previous cycle. That rules out most of the names that dominate the market today.
But you don’t have to get too small unless you have extremely high conviction and a diversified portfolio. Today’s trillion-dollar giants were established companies in 2004 . . . survivors of the dot-com crash that wiped out their more speculative peers.
Right now a lot of investors are terrified that no start-up can survive the Fed, so they’re dumping everything with disruptive potential. Let them dump.
Think back to Apple in the iPod era. Nice little company, doing about $2 billion a quarter in sales and moving the revenue bar up about 35% a year. Profitable and decently priced relative to earnings.
Today, Roku (ROKU) looks a lot like that nice little company of yesteryear. Comparable earnings per share (give or take a nickel), significantly faster growth rate (Roku is increasing revenue close to 30% per quarter) and much richer profit margins than what Steve Jobs could even dream about back in the day.
Silicon Valley has learned a few things. They know how to run efficiently and exploit technological advances to keep costs down. As long as Roku management has the vision to expand and innovate beyond their existing streaming video platform, long-term shareholders will ultimately cheer.
Other names that compare well to the Apple of 2004 include U.S. government technology provider Tyler (TYL), programmer-support firm EPAM (EPAM) and AI vendor Dynatrace (DT). If you want an advance look at the Silicon Valley landscape of 2040, odds are good one or more of these companies will be there . . . one way or another.
My favorite in this space is payroll provider Paylocity (PCTY), which is squeezing almost as much profit per dollar of revenue as Apple did back in the iPod days . . . even though revenue is still at best 1/10 of what Steve Jobs was bringing in.
That’s absolute room to expand. Everybody in the gig economy does payroll and very few employers know how. While this is a crowded niche, it just means consolidation is coming.
Whether PCTY is a consolidator or shareholders get bought out along the road, we’ll see a happy ending in either scenario.
And the miracle of the modern economy is that you don’t have to look to pure technology for ideas. Remember what Starbucks (SBUX) has done for investors over the decades?
It turns out Poolcorp (POOL) has a similar footprint. Yes, they sell swimming pools, but management is ambitious and a housing boom is the time to make money here.
About half the revenue as Apple back in the day . . . but booking 16X as much profit per share. They’re raking in so much cash that they pay a bigger dividend yield than trillion-dollar AAPL while reserving 80% of their earnings to fuel future growth.
That’s not a dot-com dream. That’s reality. And with sales up 33% a year, POOL is becoming a bigger part of reality all the time.
Will it ever hit the stratosphere? Probably not. But if you’re afraid of growth, this is a great way to dip your toe back in.