How is Corporate Competition Affecting Your Portfolio?
Investing is hard enough, but adding corporate competition to the mix only inserts another dimension of difficulty. How do you know whether the company you’re investing in is going to continue to perform? And how do you know the company you’re investing in is going to maintain its advantage when competitors come along?
Growth Appreciation Period or “GAP” is the length of time a company can be expected to earn high returns before competition forces returns to decrease to an average rate. In other words, GAP is the period a company’s ROIC will be higher than the average return on capital.
Why Apple Isn’t so Different From a Lemonade Stand
When you were a kid, I’m sure you thought it would be a great idea to open a lemonade stand. At first, things were going swell. Customer lined up to quench their thirst with your delicious — though pricey at $1 a cup — lemonade. But all of a sudden, other kids on the block decided they wanted to also share in the spoils of lemonade stand ownership. These new competitors force the sales of each individual stand down, even if aggregate sales increase.
The growth appreciation period in this scenario would be the length of time from when you started selling lemonade to when the other kids began to take sips from your sales. In the real world, the period is not as cut-and-dry, but it stems from the same market forces.
Apple (AAPL) is a perfect example. As the tech giant churns out innovative products, other kids on the block (GOOG, MSFT, and AMZN) churn out similar products that strain Apple’s earning potential.
Investing Without GAP Makes You an Idealistic Speculator
The point of Growth Appreciation Period or GAP is twofold. First, it keeps our models conservative. A smart investor knows that companies won’t be able to sustain ultra high returns indefinitely. New Constructs analysts identify the market-implied GAP for every company we analyze to ensure the accuracy of our forecasts.
Second, GAP addresses the knowledge that companies do not operate in a vacuum. Accounting for competitive forces is necessary for intelligent investing.
Understanding GAP will help you manage your portfolio with foresight into how long a company can maintain high earnings and how industries will change with new competitive players.
New Constructs reviews thousands of SEC filings, so you don’t have to. We calculate GAP for over 3,000 companies. Get access to them all by starting your membership today.