Finding the Next Starbucks

About the Author

Michael Moe is the Chairman and CEO of ThinkEquity Partners LLC. Formerly the director of global growth stock research at Merrill Lynch, Moe is a recognized authority in identifying and investing in high-growth companies. He has been named to Institutional Investor's All American Research team and awarded "Best on the Street" by The Wall Street Journal. Moe is frequently quoted by national publications and is a regular guest on CNBC and CNN.

Main Idea

In "Finding the Next Starbucks," Michael Moe outlines strategies for identifying and investing in future high-growth companies. Moe argues that Wall Street's focus on established companies leaves an opportunity for investors to discover tomorrow's market leaders. By using a systematic framework, Moe explains how to spot small companies with the potential to become industry giants. His methodology includes analyzing key characteristics such as people, product, potential, and predictability, and leveraging megatrends that drive growth.

Table of Contents

1. Introduction
2. Finding the Supernovas
3. Growth and Risk
4. The Power of Growth - The Magic of Compound Interest
5. High Earnings Per Share = High Internal Rate of Return
6. Formula for Identifying and Evaluating the Stars of Tomorrow
7. Megatrends
8. The Four Ps
9. Valuation Methodology
10. Sources and Resources - Finding Ideas
11. Think Tomorrow, Today - Hot Areas for Future Growth

Introduction

Investing in tomorrow's winners involves more than just reading Wall Street research. Michael Moe explains that the key to investment success lies in understanding and identifying small companies with the potential for significant growth. This book provides a roadmap for spotting future giants like Dell, eBay, and Home Depot during their early stages.

Finding the Supernovas

Moe begins by explaining the importance of focusing on growth companies, akin to infamous thief Willie Sutton's focus on banks because "that's where the money is." The correlation between a company's earnings growth and its stock performance is nearly 100 percent over time. Investors should aim to identify companies with spectacular earnings growth to achieve spectacular stock performance.

He states that "the reason why Google, Starbucks, and Dell have had spectacular stock performance is that they have had spectacular earnings growth." Investors must develop a process to identify these stars of tomorrow and avoid the companies that seem promising but fail to deliver, like Boston Chicken.

Growth companies need to have a minimum growth rate, which depends on the company's size. Smaller companies need to grow faster to attract interest. Moe highlights the critical relationship between growth and risk, emphasizing that the greatest rewards come from anticipating future opportunities rather than focusing on past performance.

Growth and Risk

The relationship between risk and reward is fundamental in investing. Moe emphasizes the importance of evaluating the potential for permanent capital loss versus the probability of future business value. Successful growth investing requires finding stocks priced below their appraised value and investing in industries with tremendous market growth potential.

"The goal is to find a stock whose price is below the appraised value, not what the quotational value is as indicated by the current stock price," Moe advises. Investors should seek opportunities in industries with significant growth potential, even though such stocks are challenging to find.

Investors must also understand the risks associated with growth investing. Moe notes that "volatility is the norm," and negative returns are part of the game. The key is to focus on long-term fundamentals, as earnings growth and stock performance will align over time. Admitting mistakes and being intellectually honest about wrong decisions is crucial for long-term success.

The Power of Growth - The Magic of Compound Interest

Understanding the power of compound interest is crucial for growth investing. High earnings growth rates, combined with time, can lead to spectacular returns. Moe explains how even slight differences in short-term returns can produce dramatic results over the long term when compounded. However, negative returns can significantly undermine the magic of compounding, and investors must focus on fundamentals and be honest about mistakes.

Moe emphasizes that "compound interest, high earnings growth rates, and time create a potent combination that leads to spectacular returns." Investors must understand this magic to appreciate the potential rewards of growth investing fully. Negative returns, however, can drastically undermine the benefits of compounding. To win long-term, investors must focus on fundamentals and be honest about mistakes.

High Earnings Per Share = High Internal Rate of Return

Moe argues that past results are not indicative of future success. Instead, long-term stock performance is driven by earnings growth. Investors should focus on growth companies in dynamic markets with large addressable markets. Companies that capitalize on growing markets and possess dynamic long-term growth potential will deliver the greatest shareholder value.