The Most Consistent Growers

Looking at revenue growth first is a recent strategy that I have started using when looking at stocks. It used to be that I would first look at the PE Ratio, and basically it was the lower the better. This is why I brought Scott Technology, which has been around for 100 years. It was also why I brought a lot of property stocks about 4 years ago. Of course none of them have done particularly well. The reason why is pretty simple, they have little revenue growth. Look at a big boring company like Procter and Gamble, which is a very good consumer staples company. It has a PE of 28, which is fairly high for a consumer products company, Over the last 8 years it has averaged a slow revenue growth rate of 3.7%. Basically the market has given it a high (ish) PE Ratio because of its history of delivering (slow) consistent revenue growth. And along with its 2.5% dividend, Procter stock has delivered a capital growth of 35% over the last five years.

The S&P 500 on the other hand has seen capital growth of 90% over the last 5 years, far outpacing Procter and Gamble. You would wonder why; since Procter is well run and has an extensive mix of quality consumer product brands. It definitely isn't some tidbit company in the market. The companies that drive growth in the market are companies are simply have better revenue growth. During certain times, like the tech boom in the late 90s, it was companies like Intel that drove the market, as it rose 6 times between 1997 and 2000. It quickly fell back down to earth though, and halved by the end of that year. During times of resource booms, like in the 70s and in the 2000s, stocks like BHP and Rio Tinto have outperformed the market. There have been lots of times various companies have shot up like a rocket and fell down to earth just as quick.

The companies that have consistently driven capital growth in the S&P 500 for at least the last 25 years, have been the big tech companies like Salesforce, Amazon, Microsoft and Nvidia. As an example, Nvidia has risen by 2,600% over the last 5 years; Microsoft has risen 200%, Apple has risen 260%. And these rises have been driven by what? Revenue growth of course. Nvidia recently announced that it has grown its year-on-year revenue by 122%. Owning these stocks is the key to beating the market over the long term. And these are not really new companies; Nvidia was founded in 1993, Microsoft in the late 70s.

My argument in this blog is simply that revenue growth is the first thing you should look at, not book value or PE Ratio. Profitability is important as well. But to outperform the market, a company must have a consistent record of strong revenue growth.