The next generation of growth investing has arrived. It's time to meet the players

Successful growth investing through the 2010s wasn't exactly rocket science. Back then, you could just buy the big end of the Nasdaq, sit back with a cuppa and watch your portfolio grow. And grow. And grow.

But those heady days are behind us, explains T. Rowe Price's Sam Ruiz, a portfolio specialist at T. Rowe Price and this week's guest on The Rules of Investing. 

Inflation and the rate hikes made to combat it have sunk growth stocks this year, with tech-heavy Nasdaq losing roughly a third of its value.

The Fed? Well, it's seemingly figured out that it works for the economy rather than the stock market. 

"What you want to pay for particular companies is something you're going to have to be much more sensitive to," says Ruiz. 

"Investors are still of the mindset that if it's optically down 30-40%, then buy the dip. It's going to be much tougher from here."

The global equities team Sam's part of still hold some of the growth stalwarts, such as Apple, Amazon and Microsoft. But their gaze has shifted elsewhere. 

In this wire, I explore the fall of the Nasdaq darlings, and list the stocks laying in wait to take the throne of growth investing. 

Back to earth

The biggest growth companies, namely those under the Big Tech moniker, likely aren't going anywhere. 

But as the saying goes, a good company does not make a good stock. 

"There are companies today that arguably wouldn't be the companies they are, or wouldn't have been successful at all, if it wasn't for the ultra-low interest rates era that we had," says Ruiz. "Companies like Amazon, Netflix, even Tesla."

Couple with that the low cost of money, which has allowed aggressive investment in these companies. 

"It's also allowed these companies to trade at very high multiples."

These lofty valuations have also seeped into the very way these companies are structured. A structure that will need to change. 

Stock-based compensation an example of this.

"You are a company with a high valuation that has paid stuff in stock. You lure someone in saying 'I'm going to pay you $1 million total compensation,' but only $100,000 in cash. I'd be happy to take a $900,000 bonus in stock because it's never gone down," says Ruiz. 

"But if that stock has gone down 80% and you're an employee there, you're probably going back to the company saying 'I don't believe in the stock you're giving me, pay me more cash today.'"

This will impact the way companies fund themselves and the way they attract and retain talent. 

"You might seen increased attribution, you might see layoffs, or you may see them aggressively chase staff with stock-based compensation and dilute shareholders, which is a worry, or they might expense that which will hit profits."

What's new on the menu?

Ruiz has his eyes on "cyclical companies that people may never have attached [the word] 'growth''."

Here are a couple of them. 

Nutrien (NASDAQ: NTR)

Nutrien is the largest producer of potash and the third largest producer of nitrogen fertiliser in the world. 

"Based out of Canada, historically very cyclical but as a result of the (Russia-Ukraine) war, effectively 40% of the supply comes out of Russia and Belarus," says Ruiz.

If you take 40% out of the market at a time when we're literally staring in the face of a hunger crisis because we haven't got enough grain or fertiliser coming out of Eastern Europe, there's going to be a lot more demand for a structurally undersupplied commodity like potash.

Charles Schwab (NASDAQ: SCHW)

Want exposure to the interest rate cycle? Look to the UK equivalent of Commsec. 

"This is a business that's organically growing high single digit to low single digit in its own right, and has just done an acquisition that's accretive to the bottom line."

When interest rates rise, so too does the interest charged on things like margin loans, bank loans and other securities.

"This is a business that had around $9 billion in cash on the balance sheet, deposits from their customers, and when you have the Fed basically buying all these money market instruments pushing interest rates to zero, they're earnings nothing, and when you're seeing what rates are doing today, you get leverage to higher rates and what that does flowing through to net interest margin and bottom line, but with no credit risk."

North American Banks

Until early this year, the situation for banks was this. They had one product, and the price charged for that product was essentially zero. They had to maintain branch networks and other cost structures. They underinvested in technology. And innovation fuelled competition from FinTechs. 

"All that has essentially rolled over," says Ruiz. 

Now, the cost of money going up, competition has fallen with FinTechs now fighting to survive (and some filing for bankruptcy), branches are being rationalised, and there's much greater investment in technology.

"We're going to see a structural new zone in the returns these banks generate... so historically 9-10% ROE but we think they can sustain 12-13% ROEs from here," says Ruiz. 

The market view of these banks is negative due to fears of shrinking loan books and bad debt provisions. However, Ruiz believes these fears are overplayed. 

"We just don't think we're going to see a credit cycle anywhere near the Global Financial Crisis, yet the market is trading these banks at an historically low trough of around 9x forward earnings."

"So if the credit cycle isn't as bad as everyone thinks - and we've already seen net interest margins are much better than where they were - then a lot of that flows through to the bottom line."

JP Morgan Chase (NASDAQ: JPM) feature in T. Rowe Price's top ten holdings. They also own Huntington Bank (NASDAQ: HBAN) and Signature Bank (NASDAQ: SBNY). 

Nubank (NYSE: NU)

Finally, there's the Brazilian neobank Ruiz named as the stock he'd hold if markets closed tomorrow for five years: 

"Nubank is a business that's built a social network approach engaging users in an under-penetrated market within a traditionally lazy banking sector," says Ruiz. 

"This is a business we think can grow revenues by 60% per annum. Predominantly they've got a very successful credit card business where they're taking very big share in Mexico and Colombia, where they're now the largest issuer of credit cards in those markets. [And] they've got the engagement scores that social media are typically able to obtain, which means they're ability to engage their customer base is very strong."

All told, Ruiz's bullishness on Nubank is based on their ability to "release a lot of operational leverage and accelerate their pathway to profitability."

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T. Rowe Price Global Equity Fund I

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