Peeter Koppel, two decades in the financial markets
In general, it seems that the desire to pursue growth derives from human nature. There is always a need for better, faster and more. And even in a situation when the time has come when the scarcity of certain resources has begun to set limits on the natural desire for growth in human nature, growth is being sought within those limits. For example, the increasingly popular concept of the circular economy aims to keep valuable resources effectively used in some way for as long as possible.
However, the scarcity of resources or the growing desire to preserve the environment are putting pressure on efficiency/productivity growth, which, by the way, is the second most important driver of structural growth(!) in addition to demographic processes. Thus, the pursuit of growth is natural for man as an "economic animal," motivated primarily by profit. However, while resources are limited in practice, finding even theoretical limits on productivity growth still requires very good imagination. By the way, thus all kinds of ideas of sustainable shrinkage and the like tend to run counter to both human nature and economic growth as such, or at least one of them.
When the pursuit of growth is placed in the context of business, a growth company is a company that is able to generate significant growing cash flow and/or profits. If the question arises as to what is meant by "significant" in this context, we are talking about rates that are significantly faster than the economic, market or industry average.
Another very important feature of a growth company is that the company is able to put its retained profits to work very well by reinvesting it into the company. However, this means that an important feature of a growth company is that the earned profit goes to the company's further growth. It’s on the contrary in the case of the so-called “value companies” or "cash cows", where the profits can no longer be effectively used by returning/investing them into the company and therefore the profits are distributed as dividends to the owners, or the shares are repurchased if they are listed on the stock exchange.
If we look at which sectors in general we find the most growth companies, then globally it has been the technology sector. Often, such companies have continued to increase their turnover and profits significantly after their listing on the stock exchange. This, by the way, in a context where their ratios while listing have implied that the company has reached a certain stage of maturity and professionals tend to say that "everything is already included in the price." A good example from the TOP 101 is the LHV Group, which was held in the described way during the IPO, but which has proved to be a real pot of gold for the owners.
The company's share growth gained real momentum last year after the health crisis shock to the economy and thus to the markets. In general, other financial sector companies operating here also stand out as strong value growers, regardless of the origin of their owners – it would be an exaggeration to call some of them "growth companies", as they are rather in the “cash cow” stage of the old economy. The environment has simply been extremely favorable. At the same time, we also find a company among the fast growers in which case we can mention the technology sector – Nortal.
However, if we look at how growth companies behave in different phases of economic cycles, they will, of course, do best when the economy is in a strong growth phase. Of course, turnover tends to increase in this case, but this is not the only factor. In the growth phase of the cycle, money tends to be readily available, which allows growth to be further boosted. However, anyone who understands the concept of leverage knows very well that it tends to work both ways. Thus, growth companies are sensitive to the opposite direction of the cycle and their tendency to be amplified in the "wrong" direction. This is also due to the fact that in the more unpleasant phase of the economic cycle, credit is both more expensive and more difficult to obtain. However, for some of the fast-growing financial intermediaries on the list, the more expensive money may be very positive as the net interest margin increases. Also, all banks would probably be happy if in the case of deposits at a historic peak, the central bank's deposit rate would not be negative and they wouldn’t have to hold conversations with their large customers about how keeping money in the bank means paying the bank, not the other way around.
In general, growth companies thrive in the economic growth phase and can be problematic in a situation where the economy is not doing so well. However, it already depends on the field in which the company operates. For example, retailers whose business model is based on low prices may also be growth companies in the midst of a recession. At the same time, the health crisis has not had a good effect on traditional retail trade. The biggest losers, of course, are the companies that suffer directly from the economic downturn and the inability of people to travel.
In the context of fast value growers, another area stands out in addition to finance – energy. After last year's fright, where oil prices in the United States were in the red because everything was ‘in excess’ we are now in the opposite situation, where everything is 'in the lacking.' The price of energy has only gone up, and many of the companies that have ‘their skin on the market’ in this particular regard also clearly showing value growth – be it Graanul Invest, a large piece of which is known to have been sold recently.
But what else can be concluded from the Top 101? The fact that even in the midst of an unprecedented crisis, it is possible to seriously create and nurture value. The question arises as to how much of this is related to the ongoing monetary policy experiment, but let these thoughts remain for another time, and we can only rejoice in this table at the moment!