Picking winners


How does the S-curve of a company or industry help to identify winners?

During a recent national roadshow, Nick Griffin, CIO of Munro Partners, explained that when it comes to investing, there are always lots of losers and just a few winners.

This article examines how the S-curve of a company or industry can help to identify winners. It also examines the sector likely to produce tomorrow’s winners – as well as relegate a whole lot of companies to join history’s losers.

Winners and losers

While a focus on today’s winners and losers is important, picking the winners (and losers) over the medium to longer term is more important. While it might sound simple, when several companies are vying for pole position in a specific industry, which is likely to prevail and deliver solid returns to shareholders?



Figure one illustrates blended forward earnings per share (EPS) 12-month expectations versus the share price of Mastercard and the Bank of America.

Mastercard’s share price mirrors its earnings growth and has done so in a structured manner. This is because the earnings of Mastercard are more predictable; the company has been a beneficiary of the shift from physical to digital cash and its earnings will likely continue to grow.

On the other hand, the Bank of America’s earnings rely on a myriad of factors – the US economy, the global economy, politics, interest rates, the upcoming election. It relies on things that cannot be easily forecast.

In hunting down winners, investors need to seek the Mastercard situation, one where the market misprices growth and its sustainability.



A 2017 study[1] examined every company that listed on the US sharemarket over the last 90 years and analysed the outcome had you bought and held every single one those 26,000 companies (figure two). Compared to Treasury Bills, the analysis found:

  • More than 50 percent of every company listed in the US, or over 14,000 companies, eventually have a valuation of zero
  • The next 11,000 companies only make enough to offset what those 14,000 lose
  • This leaves 1,000 companies – or less than 5 percent of all statistical observations – make up the entire $US45 trillion of wealth created in the US sharemarket.

Further, the top 50 of those 26,000 companies comprise 40 percent of the wealth created.

As this study illustrates, it has always been just a few stocks driving the sharemarket – the difference lies is in the structural changes driving the market at that time.

The S-curve helps identify the wealth creators

The S-curve tracks how a company or industry grows over its lifecycle. There comes a point in a lifecycle when growth inflects, driven by a structural change. It is the tailwind created by the structural change that allows a company to deliver and create wealth.

Facebook, Amazon and Apple have ridden the wave of demand for technology products and services that did not exist 15 or 20 years ago, but which are now considered indispensable in our daily lives.

To recognise the winners, investors need to identify both the next round of structural changes and the companies that will benefit from them. Importantly, this needs to be at the start of the S-curve and not at the end.



Figure three shows the S curve of the global mobile phone market and the global smartphone market.

From 2008 to 2017, while the growth in the overall mobile handset market was relatively flat, smartphone penetration went from less than 10 percent to approximately 70 percent over the same time period. In 2008, there were 10 mobile phone stocks to choose from but only two were winners – Apple and Samsung. Once mobile phone giants – names such as Blackberry, Motorola, Eriksson and Nokia – failed to seize the structural growth opportunity in smartphones, and as a result, were the losers.

Even though the smartphone market has stagnated, Apple did two things to create value for shareholders; it introduced a substantial share buyback program and set up a great services business, through which it was able to continue to grow the overall company. So, even though the smart phone market is not growing, Apple has taken advantage of structural trends to maintain its growth trajectory. This agility is a characteristic common to winners.



Figure four shows a series of four S-curves; although some of these stocks are well known, how far they are through the S-curve is based on Munro Partners’ estimates. The four structural trends at play here are:

  1. Digital payments: there are whole sections of the world that haven’t yet converted to digital currency, it has less than 60 percent penetration. This includes large markets such as the US and southern Europe, as well as emerging markets. The runways for winners Visa, Mastercard and PayPal are long. Even when each company comes to the end of the runway, they are likely to diversify and create new runways, something that winners typically do.
  2. Digital advertising: this form of advertising currently represents 50 percent of all advertising today. Google and Facebook will continue to dominate and be the winners in this segment.
  3. Digital enterprise: the new and growing segment of cloud computing has created new opportunities. The shift to the cloud has been dominated by global giants Amazon and Google. Software companies can be expected emerge and dominate; the same network effects that turned Google into a trillion dollar company are at play here and, for example, could turn Salesforce into the CRM for the world.
  4. E-commerce: it may be surprising to some, but this is the least penetrated area, largely because it’s more physical than digital. The retailer has to source the products, store the products and physically get the products to the buyer.


The next big S curve – climate change

The most significant themes in 2020 are climate change and sustainability. Although it’s been discussed for years, according to Munro Partners, the tipping point has now been reached. This thematic is coming to the fore this year and will extend well into the 2020s and beyond.

The rationale is simple – the world’s leading companies are stepping up and proactively taking action to reduce their carbon footprint because their employees, customers and shareholders demand it. Globally, there is some US$30 trillion in ESG mandates, a figure which is growing; and one which means company CEOs will listen and act.

Increasingly, investors are forcing companies to disclose their emissions and their plans to manage those emissions. One hundred and fifty Fortune 500 companies have committed to going zero carbon. A number of companies, including Microsoft, Amazon, Facebook and BHP, are building their own wind farms…not because of a profit motive, but it will help them achieve the goal of being carbon neutral.



As well as corporate action, an increasing number of countries are committing to zero carbon targets in law, including the UK, France and Sweden, as well as states of the US including California and New York (figure five, left hand side). In Australia, although the federal government has made no such commitment, each state has committed to net zero emissions by 2050.

The journey to net zero emissions will cost well into the many trillions of dollars; the UK alone believes it will cost over a trillion pounds to go carbon neutral. Irrespective of beliefs around climate change, decarbonising will happen, and this trend will continue to gain momentum and provide interesting and profitable investment opportunities. This, without doubt, is going to be one of the big investment trends of our lifetime and, once again, it’s all about identifying and picking the winners.

Some of the beneficiaries of this trend include:

  • companies that are leveraged to clean energy
  • batteries and storage supply chain
  • more efficient transportation and electric vehicles
  • businesses that are catching on to consumer trends around food, packaging and sustainable buildings.

As always, there will only be a handful of winners worldwide and a long tail of losers. There is a laundry list of businesses which will need to adapt or die to survive in a carbon neutral world.


[1] Do Stocks Outperform US Treasury Bills?, Hendrik Bessembinder, November 2017
The information included in this article is provided for informational purposes only. The information contained in this article reflects, as of the date of publication, the current opinion of Munro Partners and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither Munro Partners, GSFM Pty Ltd, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.

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