Two companies Hyperion expects to earn ‘substantially higher’ revenues over the next decade

The current economic climate is an outlier rather than a new paradigm, and normality will soon resume – that’s the view Hyperion’s deputy CIO Jason Orthman shares in the latest episode of interview Rules of Investing, our first for 2024.

“Our view is that we’re in a low growth, low inflation, low interest rate world. Clearly, there’s been an aberration with COVID…but as things normalise and move forward, we’re going to return to that,” Orthman says.

“It’s looking at the structural drivers of those key aspects and over long periods, it’s the demographics that dominate.”

Equities

How Hyperion unearths rare but exceptional growth companies (plus two that pass their filters)

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That’s the big-picture thinking behind this growth-focused fund manager’s investment approach. Hyperion’s team looked back over a vast volume of data – more than 200 years’ worth – to conclude that Growth-focused companies will outperform in the long term.

“What’s happened over the last few years hasn’t changed our view at all. We think we’re going back to low growth, low inflation and therefore low interest rates,” Orthman says.

This is part of Hyperion’s 25-plus-year thesis for markets. The effect of technology also forms an important part of this view, with disruptive technology also set to put increasing pressure on energy prices and wages.

"The market is so fixated on inflation, where interest rates are going, and short-term price-to-equity ratios. But we’ve seen no reason to change our forecast average over the next 10 years,” Orthman says.

What does this mean? While these conditions make it more difficult for corporate management teams to increase profitability, they also expand the lead between those high-quality companies and others.

“We expect that earnings per share for the broader market will grow at low-single-digits over time…that will produce low to mid-single-digit equity returns, which isn’t that attractive for the risk you take on," Orthman says.

“The good news is that it makes growth investing more valuable, if you can get it right, if you can find businesses that can grow their EPS at double-digit rates, that becomes incredibly valuable.”

His team’s long-term study has found that Value stocks have periods of outperformance, “but every time nominal GDP growth rates slow or contract, Growth tends to outperform value.” This has played out during every recession between 1926 and now.

“If you can find these businesses that have something special and disruptive about them…they’re less sensitive to these conditions.”

How to find structural growth trends

During the interview, Orthman discussed some of the ways Hyperion identifies companies it believes will display long-term earnings growth. Such characteristics include productivity, the shift towards artificial intelligence (AI), and banking and payments.

ServiceNow (NYSE: NOW)

A company name that crops up a couple of times during the interview, ServiceNow is a California-based software company that helps companies manage digital workflows. Its software is currently used by around half of the large enerprises in North America and is well on its way to holding 80% market share – “and 20 years later, no credible competitor has emerged,” says Orthman.

In the company’s latest earnings result for the fourth quarter of 2023, management reported 25% and 35% growth in sales volumes and earnings respectively – that’s despite the continuing tough macro environment.

“If you’ve got a value proposition and a product that’s highly needed, you can grow regardless of what’s happening in the economy,” Orthman says,

REA Group (ASX: REA)

In a local context, Orthman names property listings portal REA Group as a similarly positioned company. The stock has been in Hyperion’s portfolio since 2004.

“That stock hasn’t increased five or 10 times over that period – it’s increased more like 150 times. It has validated our philosophy, process and aspirations and given a real reference that it can be done,” he says.

“If you’ve got a market-leading business that continues to reinvest in its product and continues to nurture its ecosystem, it can grow at double digits while being capital-light.”

Wisetech Group (ASX: WTC)

Asked to name a company he believes will have substantially higher revenue seven to 10 years from now, alongside ServiceNow, Orthman also nominates the logistics software company founded and managed by CEO Richard White.

He believes Wisetech’s outlook is similar to that of ServiceNow, with no credible competitor leaving it as the dominant competitor in its field.

It now holds contracts with around 45 companies using its core product, with another new market opening up in customs business.

“It’s dominating software delivery into logistics, more specifically in freight forwarding. We think that business has been de-risked a lot since we first invested in 2017,” Orthman says.

“We see no reason why they can’t replicate the success from freight forwarding in customs.”

Though he concedes the share price can be volatile, Orthman believes the business has the scope to become even larger in the next five to 10 years.

To hear the full interview, you can listen to the podcast on the link below: