Two signs a new dawn is arriving for growth investors (and five stocks to take advantage)

The market narrative is changing, with investors seemingly less concerned about recession and more concerned about not missing out on the next rally.

At Livewire, we’ve been speaking to fund managers who have held bullish views and who continue to hold them looking forward.

Today we’re speaking with Jeremy Gibson, Portfolio Manager at Munro Partners, for his take on the macro conditions, why the glass is half full, and the opportunities the Munro team is pursuing.

The bull case

By way of background, Munro has a core focus on global growth equities and, as Gibson explains it, one of the key tenets of the process that Munro employs when hunting for opportunities is that “stock prices follow earnings”.

It follows that if earnings have bottomed, so too should have stock prices. Gibson comments that earnings “appear as though they troughed in about February this year”.

He adds that if earnings continue to pick up and we see positive earnings revisions, “that’s a pretty good backdrop for the market”.

Further supporting the bullish narrative, and closely tied to earnings, is the fact that “rates have likely peaked”. Gibson adds that with bond yields coming down, it “effectively means that valuation multiples are no longer going down, and we don’t have that headwind anymore”.

“We've got earnings getting revised up and we don't have any drag on multiples anymore, so they are two key tenants for the bullishness”.

Where are you hunting?

During our chat, there were three distinct areas of the market that Gibson talked about as areas in which Munro is hunting for opportunities, namely AI, luxury goods, and climate.

Artificial Intelligence

When discussing the AI opportunity, Gibson notes that Munro is heavily focused on the infrastructure layer of AI.

“That's the hardware layer with names like Nvidia (NYSE: NVDA) and all the semiconductor winners”. He adds that the public cloud infrastructure layer has also been an area of focus, noting that “we think AI's going be massive in the enterprise market”.

When it comes to stocks Munro is using to pursue the opportunity, Gibson highlights Microsoft (NYSE: MSFT) and ServiceNow (NYSE: NOW).

While we’re all familiar with the former, with many using Microsoft products on a daily basis, Gibson highlights the Azure cloud computing division as a key driver for Microsoft moving forward.

“They're winning on the infrastructure layer with Azure and their partnership with open AI – which they now refer to as Azure AI services. They had 4,500 customers in mid-May and they now have 11,000 customers (as per the company’s recent update). So that business is booming.

They are clearly leading in AI, so we're expecting a 13% uplift to 2026 earnings from the Microsoft Office Co-Pilot AI applications. 

For those unfamiliar, ServiceNow is a software company that develops a cloud computing platform to help companies manage digital workflows for enterprise operations.

According to Gibson, it is releasing a new product in September called NowAssist, “which is similar to Microsoft copilot where it's like an AI assistant that sits on top of the software”.

Ultimately, it will help users utilise the service more productively but it will also significantly boost revenues.

“The price points are 60% above the existing product, so it should be a massive win for them”, says Gibson, who adds that ServiceNow “haven't put anything into their guidance for this product. So it's just incremental upside where you're going to get positive earnings revisions”.

Luxury goods

In the luxury goods space, Munro owns LVMH (MC:EN Paris) which counts some 60 subsidiaries in its stable including Louis Vuitton, Hennessy, Tiffany & Co., TAG Heuer, and Bulgari. Munro also owns Richemont (VTX:CFR), which counts Cartier, Vacheron Constantin, Dunhill and Montblanc in its stable. 

When it comes to this segment, Gibson contends that there has been some scaremongering around some soft Chinese GDP data “but we don't think that hits luxury goods names”.

“We think luxury goods are still well placed with a tailwind from the Chinese consumer”, he adds.

Climate

Climate is also a key area of focus for Munro, which runs the Munro Climate Change Leaders Fund separate from the Global Growth Fund.

The thesis for climate investing is “predominantly based around the tailwinds from things like the Inflation Reduction Act (IRA), which is going to be a massive boon”, says Gibson.

One stock that stands out

A stock that Gibson zeroed in on during our conversation is Chipotle Mexican Grill (NYSE: CMG). And whilst Munro believes that the US consumer is “slowing down”, Gibson states that Chipotle is:

“One of the best businesses I've ever come across”.

One of the major reasons for that is Chipotle’s ability to generate positive cash flow so soon after building a new store.

“When they open a store, it costs about $1.1 million to open. And then year two they're pulling cash flow out of that business of $750,000. And so they're breaking even in less than 18 months and then they've just got that cash flow stream in perpetuity”.

Gibson adds that Chipotle is still early in terms of its North American rollout, whilst they’re also expanding into Europe.

“They've just added resources to their European operations. It's the first time they're really made a bigger step into Europe. They’ve already had the first pillar of growth being the North American rollout, where they're not even 50% penetrated. 

They've now moving into Europe, and they've just signed a deal in the Middle East for a franchise agreement which is high margin because you’re just clipping the ticket, getting a franchise royalty payment”.

The good news doesn’t stop there, with Gibson noting other growth levers that the company is pulling by becoming more operationally efficient in the kitchen.

“Things like a dual-sided grill. It cooks a steak in less than one minute. Versus the previous product that they're using, which is four minutes.

So, it's just going to speed up their process and make them more efficient, which allows more consistency of the food and allows the workers to be serving rather than spending time on the grill cooking. It's going to be a massive productivity boon for them”.

As a final cherry on top, Gibson points to the potential for Chipotle to expand its menu and add breakfast options. He notes that they’re not particularly focused on it right now, given the other more immediate growth options, but it’s something that they can add down the track.

“It's just uncapped growth for 10 plus years for Chipotle, so that's a name we're pretty keen on”.

What would derail the bull case?

Whilst bullish, all good fund managers are also realists and mindful that the base case doesn’t always play out.

For Gibson and Munro, a big fly in the investment ointment would be a poor take-up in AI products.

“If these AI products come out, everyone uses them and says they are no good, that's not going to be great. Stocks could end up being revised down in a core part of where we're invested today. So, that's probably the biggest risk from a fund perspective, for our growth fund”.

Dream investor

For a bit of fun, I asked Gibson who would be his dream investor in the Fund and he nominates Aussie superstar golfer Cam Smith.

Gibson was fortunate to meet Smith in December last year and shares that he was very humble and generous with his time.

But the reason why he would want him as an investor is because of his focus on the process - something Gibson, and the Munro team, prides themselves on. 

In July, Smith won the 150th installment of the British Open at the spiritual home of golf, St Andrews. That, in itself, is no mean feat, but it’s Smith's club selection on the final day, in a high-pressure moment, and subsequent explanation that impressed Gibson the most.

Coming into the conclusion of the tournament, Smith had Rory McIlroy breathing down his neck. Another guy called Cameron Young was also close on the leaderboard. 

On one of the final holes, Smith used his driver (a club that makes the ball go further but with a higher risk of hitting a bad shot), when he hadn’t used his driver on that hole during the first three days of the tournament.

When asked why he made that club choice, Smith explained that it wasn’t because of the other competitors being so close to him that he had to take a risk to put himself ahead. Rather, it was simply a matter of process.

As Gibson tells it, “he explained that he just focuses on his process. The wind had changed on day four and it was the right club based on the conditions. 

He was following his process, not worrying about the noise or about what was happening around him. He's followed his process, focused, executed and it was a good decision. 

He absolutely smashed the driver and then managed to birdie the hole, which helped him win the tournament”.