Podcast Summary: TIP699 - Unlocking High-Growth Investments with Jason Donville and Jesse Gamble

Podcast Information:

• Title: We Study Billionaires - The Investor’s Podcast Network
• Host: Kyle Grieve
• Guests: Jason Donville and Jesse Gamble, Donville Kent Asset Management
• Release Date: February 16, 2025
• Description: Exploring investment strategies from billionaires and applying them to high-growth stock markets.

1. Introduction

In episode TIP699 of We Study Billionaires, host Kyle Grieve welcomes Jason Donville and Jesse Gamble from Donville Kent Asset Management. Known for outperforming the S&P 500 since 2008 through various market cycles, Jason and Jesse delve into their refined investment strategies, emphasizing high-growth stocks and resilience during downturns.

Kyle Grieve [00:04]: "Donville and Jesse Gamble are a few of the best growth investors that I've encountered."

2. Evolution of Investment Metrics

a. From PEG Ratio to Rule of 40

Jason and Jesse discuss the evolution of their investment screening processes:

• PEG Ratio: Inspired by Peter Lynch, initially used to compare growth rates with P/E multiples.
• Return on Equity (ROE): Focused on companies with consistently high ROE, typically 20% or better.
• Rule of 40: Combines revenue growth and profit margins to identify sustainable high-growth companies.

Jesse Gamble [03:28]: "We started in the last five or six years pivoting to the rule of 40... a very, very powerful tool for spotting fast growing companies with multi bagger potential."

b. Rule of 40 Applied Beyond Tech

Unlike traditional uses in software businesses, they apply the Rule of 40 across various industries to ensure broad applicability in identifying robust compounders.

3. Stock Ranking System and Portfolio Management

a. Stock Ranking Process

Jason and Jesse maintain dynamic stock trackers to compare and rank stocks based on growth metrics and valuations. They aim to own the top 10-15 best-performing stocks within their universe.

Jason Donville [04:34]: "We’re trying to optimize. We’re only trying to own mid 10 or 15. So maybe you, maybe you will make money in a name, but we’re trying to find the best 10 to 15."

b. Position Sizing

Their portfolio is highly concentrated, with the top 10-12 holdings comprising 80-85% of the fund. They employ a gradual accumulation strategy, starting with small "toehold" positions and scaling based on ongoing due diligence and performance.

Jesse Gamble [40:49]: "We take that toehold position, half percent or 1% weighting, and you’ve met with management... then you add to that position."

4. Resilience During Market Downturns

a. Performance Through Down Cycles

Donville Kent Asset Management has successfully navigated through significant market downturns, including the 2008 financial crisis and the 2022 COVID-driven bear market. Despite temporary setbacks, their long-term strategy has consistently yielded superior returns.

Jesse Gamble [08:33]: "22 was a year we just absolutely got our butts kicked... but we got through."

b. Team Dynamics and Mental Strength

Jason’s military background and Jesse’s professional athletic experience contribute to their resilience, fostering a disciplined and persistent investment approach.

Jesse Gamble [24:20]: "Believe in each other and you're decent people and you just go, yeah, just... fight this thing together."

5. Identifying High-Growth Compounders

a. Criteria for Compounders

Their selection criteria for high-growth compounders include:

1. Profitability: Consistent earnings and high return on invested capital.
2. Reinvestment Capability: Ability to reinvest profits at high rates of return.
3. Long Runway for Growth: Sustained growth potential over multiple years.

Jesse Gamble [50:41]: "Profitability, the ability to reinvest at high rates of return, and a long runway for compounding."

b. Rule of 40 Application

They utilize the Rule of 40 to assess whether a company is a viable long-term investment, seeking businesses that either meet or are rapidly approaching this benchmark.

Jesse Gamble [31:36]: "If you can find a compounder that’s growing at 20% a year for the next 10 years, whether you pay 20, 25, 30 times, the compounding effect will make you a winner."

c. Example Companies

VitalHub exemplifies their approach, having grown from an unprofitable startup to a high-growth company by meeting their Rule of 40 criteria.

Jesse Gamble [33:23]: "VitalHub... broke profitability and is now consistently growing at 20% a year."

6. Valuation Frameworks and Selling Criteria

a. Relative Valuation Approach

They assess valuations relative to their stock universe, choosing to sell when a stock's valuation becomes less attractive compared to peers, despite strong performance.

Jason Donville [43:12]: "We’re trying to compare apples to apples... if it’s trading on 3x and others are trading better, we reassess."

b. Selling Criteria

Their primary reasons for selling a stock include:

1. Decreasing Return on Invested Capital (ROIC)
2. Ridiculous Valuations
3. Untrustworthy Management
4. Excessive Debt Levels

Kyle Grieve [43:19]: "Return on invested capital starts fading... valuations get ridiculous..."

7. Macro Themes and Market Outlook

a. Interest Rates and Deflationary Pressures

Jason and Jesse share their views on the macroeconomic landscape, emphasizing that interest rates are likely to stabilize in a neutral zone without massive inflation spikes.

Jason Donville [56:17]: "I don’t see a massive spike back in inflation... interest rates are going to be neutral."

b. Declining Demographics and Productivity Gains

They highlight declining population growth and increased productivity through AI as deflationary forces shaping the future market environment.

Jason Donville [56:17]: "Demographics are massively deflationary right now... AI is driving productivity gains."

8. AI's Impact on Business Fundamentals

a. Enhancing Efficiency and Growth

AI is integral to their investment thesis, enhancing efficiencies and enabling companies to scale rapidly. They invest in firms that leverage AI as a tool to improve operations and expand growth.

Jesse Gamble [60:04]: "Propel... have AI tools and we see what their growth rate is."

b. Avoiding Hype and Focusing on Practical Applications

They remain cautious of AI hype, prioritizing companies that demonstrate tangible benefits from AI integration rather than speculative advancements.

Jason Donville [60:04]: "We’re trying not to get pulled into any of that. What are you using it for? Are you actually seeing results?"

9. Focus on Constellation Software

Despite holding Constellation Software for over 15 years, Jason and Jesse opt not to invest in its spin-offs, Lumine and Topicus, citing differences in valuation and management familiarity.

Jesse Gamble [53:23]: "Lumine and Topicus both trade on about 30 times this year's earnings... Constellation trades on 18."

They prefer to maintain concentrated holdings in companies where they have deep insights and established trust with management.

10. Money Market Funds and Cash Reserves

The guests discuss the surge in money market funds, highlighting how substantial cash reserves are being held by investors post-pandemic. They anticipate a gradual reinvestment of this cash into equities as market confidence restores.

Kyle Grieve [64:22]: "It's a slow bleed. After 2000, after 08.09, ... money came back into the market."

11. Conclusion and Further Resources

Jason and Jesse encourage listeners to subscribe to their quarterly newsletter and visit their website, donvkent.com, for deeper insights and updates on their investment strategies.

Jesse Gamble [66:25]: "The newsletter is the best place to go... a lot of companies that people haven't heard of before."

Notable Quotes:

• Kyle Grieve [07:14]: "Humans can't really think in a linear manner... a company could fluctuate around, but five years from now, if it's growing at 20% a year, you've made a lot of money."

• Jesse Gamble [12:20]: "Stay focused on what's happening, update continuously... stay engaged every day."

• Jason Donville [43:23]: "It didn't do well as well... we put it into something else."

Key Takeaways:

• Adaptable Metrics: Transitioning from traditional metrics like PEG ratio to more holistic approaches such as the Rule of 40.
• Concentrated Portfolio: Focusing on a limited number of high-conviction stocks to maximize returns.
• Resilience and Discipline: Maintaining a steadfast approach through market volatility, driven by strong team dynamics.
• AI Integration: Leveraging AI to enhance business operations and identify scalable growth opportunities.
• Relative Valuation: Continuously reassessing stock valuations relative to their investment universe to ensure optimal portfolio composition.
• Long-Term Focus: Prioritizing sustainable growth and compound returns over short-term market movements.

For more insights and detailed analyses, listeners are encouraged to subscribe to Donville Kent Asset Management's newsletter and explore their comprehensive resources available on their website.