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Growth Investing

If you mention any other kind of investing other than "value investing", they'd seem like bad words next to value investing. Thanks to Warren Buffett, value investing has almost reached the nirvana of acceptance by all and sundry as the safest and most consistent long term performance tool. 
Panera Bread restaurant Westlake Ohio
Value investing to pay less for something. The off shoot of value investing is something called growth investing. It has the same basis as value investing but is willing to pay a lot more for potential. As long as growth is evident and in the works, these investors will not mind riding the bull in a growth stock.

Beware of growth stocks because they are very easy to like, and you can get totally smitten with them. Strong growth stocks usually have a strong retail element in them - its like discovering something new (assuming chewing gum has never been invented),like chewing gum and marketing it to the world. Your growth potential is enormous.
Click to show "Panera Bread" result 19
Two of the most fantastic growth stocks for the past few years have been Chipotle Mexican Grill and Panera Bread ... both I am bloody sure will be brought to Malaysia soon by Vincent Tan (who else?).

Chipotle Mexican Grill, Inc. and its subsidiaries (Chipotle) operate restaurants throughout the United States, as well as two restaurants in Toronto, Canada and two in London, England. As of December 31, 2011, Chipotle operated 1,230 restaurants, which includes one ShopHouse Southeast Asian Kitchen. The Company's restaurants serve a menu of burritos, tacos, burrito bowls (a burrito without the tortilla) and salads. The Company manages its operations and restaurants based on six regions that all report into a single segment. As of December 31, 2011, the Company delivered ingredients and other supplies to its restaurants from 22 independently owned and operated regional distribution centers. Chipotle categorizes its restaurants as either end-caps (at the end of a line of retail outlets), in-lines (in a line of retail outlets), free-standing or other.

Panera Bread Company (Panera) is a national bakery-cafe concept with 1,541 Company-owned and franchise-operated bakery-cafe locations in42 states, the District of Columbia, and Ontario, Canada. Panera operates under the Panera Bread, Saint Louis Bread Co. and Paradise Bakery & Cafe trademark names. Its bakery-cafes are located in urban, suburban, strip mall, and regional mall locations. The Company operates in three business segments: Company bakery-cafe operations, franchise operations, and fresh dough and other product operations. As of December 27, 2011, its Company bakery-cafe operations segment consisted of 740 Company-owned bakery-cafes, located throughout the United States and in Ontario, Canada. On July 26, 2011, the Company purchased five Paradise Bakery & Cafe (Paradise) bakery-cafes and the related area development rights from an Indiana franchisee. On April 19, 2011, the Company purchased 25 bakery-cafes and the related area development rights from a Milwaukee franchisee.

I had a friend who was in the States 3 years ago and tried Chipotle, loved the food, checked out the stock and saw that it was already up 50% ytd. Didn't buy, the stock went up another 100% a year later.

The storyline is the same for Panera. In August 2007, you would have to pay 24x earnings forward. If you held for 5 years till today, your returns would have been 260%.

It is "easy" for a company with a great product to churn out growth quarter on quarter, mainly by opening new outlets. Same can be said for Starbucks until it reaches saturation point, or when the number of outlets is so sizable that the number of new outlets to be opened pales in comparison thus eroding the growth factor.

The second growth factor is increase in same store sales. That is a very harsh guide as it only calculates the same store sales growth. You may assume traffic would be on an increasing trend for the one new store for the firat 6 months but after that, you are unlikely to keep getting more people in - then you have to "reinvent products" or charge higher or get customers to spend more one way or another with promotions, etc.

You can ride on a growth stock for a very long time, 3-5 years but you have to be vigilant against the figures being churned out every quarter because plenty of hedge funds and big private investor will sell the moment they see something is wrong with the growth machine.

In Chipotle's case, the stock gained 20% ytd this year but lost 22% in one day after last month's quarterly results. Chipotle still saw strong growth, 20% revenue growth, but investors focused on the flat same store sales figures.

There are other metrics you can get a handle on to better assess growth stocks. Panera is a much better run company. But you wouldn't know it looking at Panera and Chipotle fundamentals. Chipotle was trading at 40x while Panera was at 27x before Chipotle's losing nearly a quarter in value. Chipotle was priced for perfection.

Panera's earnings growth for the past 3 years was just 19% a year versus Chipotle's gutsy 25%. Sometimes investors just look at the figures and assume big is always better. In Panera's case, they want growth but managed growth. Its so easy to target opening 5 new stores a month to targeting 10 new stores a month. To manage the expectations, do proper staff training, etc. is another thing. 

That's also why Panera's profit per store is much better than Chipotle. Heck, I think even Buffett will buy Panera Bread.


JL said…
I just read the article on Panera in this fornight's Fortune mag, a great article about the company's founder who is now the co-CEO of the company in charge of company direction while the other co-CEO is more towards operations.

Seems like good management.

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