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The Price of Innovation

As you well know, the goal of our portfolio is to identify and invest in innovative growth companies sourced by our investment committee, and invested with the patience to provide the opportunity to earn returns. 

As my partner, Keith likes to say “No body owned Amazon from its IPO until now”, and while a select few may have, the point of the saying is that growth stocks can be very volatile and incredibly difficult to own through cycles.

This reality is driven home in my minds by the fact that Fidelity did a study of 401k’s a while back to identify who earned the best returns… and were surprised to find out the trait their best investors shared… they were dead! 

With that as a backdrop, I’ll turn to the factors we’re looking at in our portfolio. The combination of higher interest rates, economic growth concerns, and market hand-wringing over what COVID beneficiaries will be able to keep their growth long-term has led to significant volatility in the high growth areas of the stock market. 

One phenomenon that we often see during market drawdowns is that a group of companies that are completely different in terms of their business may trade almost completely together. For example right now you might find that many days enterprise software stocks, sports gambling companies, social media companies, and semiconductor manufacturers trade in the same direction as each other. To us, this means right now the market is more so trading factors (growth, interest rates) than the prospects of individual companies. Some of this is justified with higher rates, but we think potentially overblown.

With many companies moving together regardless of business diversity, we wanted to detail below how we’re evaluating the stocks in our portfolio during these volatile times: 

Business Model 

Unlike a mature business, the margins of the companies we own are unlikely to be similar to what they may be 5 years into the future. We examine the “unit economics” – or the economics on the next dollar of revenue in an attempt to identify what the potential margin structure looks like long-term. Our goal is to decipher between businesses that may always struggle with profitability vs those with great prospects but are growing toward a critical mass. 

Total Addressable Market 

What problem is the company trying to solve and how big is the problem? The opportunity difference between e-commerce, digital signatures, and video conferencing vary greatly. Combined with our underwriting on the next factor, “TAM” is an important input to our research. 


Competition is at the root of entrepreneurship and innovation but likewise can prevent companies from achieving what they set out to do financially. We keep an eye on competition to identify where pricing battles may be fierce, market share may be difficult, and the advantage of innovators is shrinking. Ride-Share is an example of a market that while few competitors are present, the switching costs are non-existent and company profitability has somehow never achieved meaningful levels. 

Growth Duration 

How many years do we believe the company can grow revenues at high rates (10-15%+)? Ultimately, the longer growth will remain high, the more we’re willing to pay for an asset. This should make intuitive sense, but can be difficult to forecast. Our work on Growth duration is a function of current revenues relative to TAM, market share, industry competitive dynamics and business model. 

On a daily basis, we are looking at all of these characteristics to make the most prudent decisions for the portfolio. Where our convictions have waned, we have exited several companies redeploying that capital into names we believe will outperform when the winds of innovation are again favored by Mr. Market. 

Right now, the market in our minds is valuing most highly current profits and how those profits will grow in the immediate future. While this makes some sense with higher interest rates, during these periods gemstones have a tendency to get thrown out with Coal Ash and we will continue to implement our process to position the portfolio to take advantage when smoother seas prevail. 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss.

Investing involves risk including loss of principal.

May 2022

Chris Hammond 

Chris Hammond

The Chartered Financial Analyst credential is considered by many to be the gold standard in investment management designations. The average 4-year commitment and rigor for this designation speaks to the degree of dedication exhibited by its’ candidates. Chris Hammond is a CFA Charterholder.