If the markets were truly Darwinian, would growth investors exist? They pay up for stocks with strong prospects. That is, they shell out for something that might materialise, in contrast to value investors, who pay less for assets that exist now. Looked at this way, there is a reason that growth investing does not have a hero such as Warren Buffett. It’s stupid.
Then you look at Panera Bread. In August 2007, a starry-eyed growth investor would have coughed up 24 times forward earnings to own the restaurant chain. Five years later, he has a return of 260 per cent, all driven by fundamentals: same-store sales growth has averaged mid-single digits, the number of restaurants owned by the company has risen by nearly half, and margins have widened. Who’s stupid now, Warren?
Well, a very similar story might be told about Panera’s competitor, Chipotle Mexican Grill. The company has a history of great growth and profitability. Its stock chart looks very similar to Panera’s – until last month, when it reported a quarter that despite being very strong by normal standards (20 per cent revenue growth) featured softer than expected same-store comparisons. The stock lost a quarter of its value. Is it possible to tell a Panera from a Chipotle in advance? Maybe. It helps to know the difference between expensive and very expensive. Before its blow-up, Chipotle was at 40 times earnings to Panera’s 27.