At the first meeting of the club, Inigo presented the framework he uses to invest in growth companies: GARP, or Growth At a Reasonable Price. The challenge an investor faces when dealing with growth companies is always the danger to overpay for growth, and having a set of defined criteria is a must-have when we venture into these territories. After presenting how he evaluate GARP companies, Inigo then proceeded to present a good growth company matching his criteria: Scatec Solar ASA.

The slides of the presentation are available here:

Highlights of the presentation:

  • Most companies having a high growth rate are likely to revert to the mean in the future, so how to find those who will continue to grow?
  • The answer resides in Quality. Quality companies usually enjoy a high growth for a much longer time than other companies.
  • How do we define quality? Inigo took the time to go through the writings of most successful investors and made a summary of the characteristics they are most looking for:
  • Growth rate between 15 and 30% per year (above is rarely sustainable)
  • Financial Strength(i.e low leverage)
  • High Return on Invested Capital
  • A Moat (i.e a sustainable competitive advantage)
  • A small Market Capitalization (inferior to $300 millions)
  • Once we know we have a quality company, it is important to know if the price is reasonable
  • To evaluate the price, Inigo is fond of comparing multiples of valuation across companies
  • It is therefore important to have patterns to which we can compare the multiples (Inigo often use Berkshire Hathaway for this purpose)
  • It is also important to know which valuation multiple is most relevant for a given industry (ex: P/B ratio for financials, EV/Ebitda for industries…)

Analysis of Scatec Solar ASA:

  • Scatec Solar is an Norwegian, integrated  and independent solar power producer
  • It has enjoyed so far an annual growth rate of 13%, has very moderate leverage, and a big backlog of upcoming projects for installing Solar Power installations.
  • Management has an history of delivering on its promises and there is a lot of insider buying activity 
  • Given current prices, returns of around 19% could be reasonably expected.