In search of wide protective moats

Regardless of the news flow or the prevailing economic backdrop, Kalra, who has managed the traditional mutual fund version of Blue Chip Growth since 2009, adheres to a consistent investment philosophy and process. “I try to find companies that are participating in large, underpenetrated addressable markets where investors are not only mispricing the absolute rate of growth but also the durability and sustainability of growth,” he says.

In particular, he and supporting analysts seek companies that they believe have the potential to sustain earnings growth of 10% or greater for at least 3 to 5 years. Historically, hitting that double-digit earnings threshold has held strong predictive power for subsequent outperformance. It also helps to significantly pare down the universe of potential investing candidates.

“That 10% hurdle rate really provides a nice benchmark for us to fish in an economy where there are a lot of fish,” he says.

This leads him to companies in industries with high barriers to entry, that have strong competitive advantages, pricing power, and the potential to benefit from long-term tailwinds. He feels a growth blue-chip company should have a compelling business model that could enable it to achieve high levels of profitability for years to come. Kalra looks for businesses with robust levels of free cash flow (or with the potential to achieve that in the future), and high returns on equity and capital.

One component of the analysis is to determine if a company is gaining or losing market share. “When a company starts to show signs of market share plateauing or slightly declining, it’s a yellow flag for me,” he says, and can be a signal to start trimming a holding.

Quarterly company earnings results are a report card, he says. “The market grades the company and I get to grade the company.” Sometimes the report cards match up, but often they’ll diverge. For example, the market may punish a company that is delayed in launching a new product, perhaps due to a temporary supply-chain problem. But if the fundamentals remain sound then Kalra may use the dip as a buying opportunity.