I think most of my ideas in would fall under the bracket ‘cyclical compounders’.
While the term sounds like an oxymoron, it primarily refers to great businesses that operate in industries with structural long-term growth tailwinds but have huge short-term business cycles.
For example, let’s take Ryan Air.
The short-haul airline travel industry as we see it has always had structural growth opportunities.
However, over the short term, the business and share price are hugely sensitive to the economic, interest rate, and commodity cycles.
This set-up has enabled very attractive entry points into the stock several times in its history compared with other compounders whose business model and management quality are well known and tested.
As with many value investors, I evolved from focusing entirely on cheap stocks to appreciating quality and growth.
While, I haven’t really been able to come to terms with paying high multiples for secular growth compounders, I am comfortable buying great businesses in cyclical industries experiencing a bad phase paired with the market over focusing on the short term and extrapolating the headwinds.
In fact, the importance and utility of key characteristics that you would expect in compounders, like great management and capital allocation magnify in cyclical industries.
This allows these companies to emerge stronger and bigger following each cycle.
-said Fund Manager Gokul Raj