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Racing on Weak Legs

Investors reward high-earnings growth with more capital but warns a new report from MOFS, all growth is not good growth

A Dalal street veteran and ardent follower of Warren Buffett, Raamdeo Agrawal has said in the past that the investment mantra of Oracle of Omaha has been a guide for him. And keeping in line with Buffett’s investment strategy of saying ‘no’ to the stocks that don’t fit his criteria, Agrawal in his latest wealth creation report has suggested investors walk away from companies in the hyper-growth mode if valuations hit exuberant levels. 

In his 23rd Wealth Creation report, co-founder of Motilal Oswal Financial Services (MOFS), Agrawal says “In the short and medium term, all companies showing earnings growth tend to get rewarded by investors by way of rising stock prices and market value. However, our model suggests that all growth is not good.” 

Agrawal explains that if a company’s RoE remains below cost of equity for long, then high growth actually detracts firm value, as the company has to raise significant levels of capital from its equity holders to fund its growth.

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