How to hunt 'gorillas' of the market, according to Utpal Sheth

A key concept driving Utpal Sheth's investing strategy is 'terminal value', which has helped him identify businesses with the longevity and adaptability to remain relevant and profitable over decades. Expanding on that, we will now delve into Sheth's 'gorilla investing' framework.

Gorilla investing is a strategy that emphasises finding and investing in dominant companies. These companies are known to or have the potential to demonstrate leadership across market cycles. Given their adaptability and growth over the long term, these businesses are termed 'gorilla' stocks, similar to a gorilla, which is known for its dominance in the ecosystem thanks to its strength and adaptability across climates.

What makes a company a gorilla?

According to Sheth, here are five qualities that classify a company as a gorilla:

• Rare: "There are many monkeys in the jungle, but very few gorillas." Gorillas are rare market leaders with unique qualities that set them apart.
  
• Dominant: "Gorillas are outsized and dominant," says Sheth. These businesses command the lion's share of their markets and exert significant influence over their industries.
  
• Moats and knights: "Gorillas are not challenged by monkeys," Sheth asserts. They protect their leadership with structural moats, such as branding, distribution, intellectual property and knight-like resilience that fends off competitors.
  
• Longevity: According to Sheth, "A gorilla endures over decades, not just through one cycle". Such companies consistently evolve and remain relevant, showcasing their ability to survive and thrive.
  
• Right jungle, right animal: Sheth emphasises the importance of the proper context, "Every day, you should pray to find the right jungle and the right gorilla." Success lies in aligning with the right industry and identifying its dominant player.

Sheth's 5L Grid to spotting gorillas

While defining the characteristics that make a company a 'gorilla' is convenient, finding them is challenging. However, thanks to Sheth's 5L Grid, hunting the gorillas of the market becomes easy.

The 5L Grid shows a structured way of understanding where companies stand regarding market relevance and leadership potential. It categorises businesses into five types:

• Legends: These companies are at the pinnacle of the grid. They are the rarest of the rare, with enduring dominance over decades. Sheth describes legends as "companies that have redefined their industries, showing extraordinary longevity and adaptability." Nestlé and Apple are examples of 'legend' companies, as they have shown long-standing leadership by evolving with their industries and staying relevant over time.
  
• Leaders: Leaders are dominant players with the potential to become legends. Sheth says, "Leaders are gorillas in their markets, showing consistent ability to fend off competition and sustain growth." Companies like HDFC Bank are examples of leaders who have demonstrated adaptability and scalability.
  
• Laggards: These are businesses that have struggled to grow or adapt. Sheth notes, "Laggards fail to capitalise on opportunities, often because of inefficiencies or lack of innovation."
  
• Losers: A company is defined as a 'loser' when it consistently destroys value. Sheth remarks, "Losers erode shareholder value through poor decisions and structural inefficiencies."
  
• Lallus: Lallus are companies that merely exist without creating significant value. As per Sheth, "Most companies fall under the Lallus category. They don't destroy value, but they don't create it either; they just exist."

Sheth stresses that gorilla investing focuses exclusively on the first two categories. He states, "The goal is to find companies with the characteristics of gorillas - dominance, adaptability, scalability and longevity." These businesses stand apart as they have survived and thrived across multiple market cycles, thus creating substantial terminal value.

Incumbents vs challengers: Who comes on top?

According to Sheth, an incumbent market leader can only stay at the top if it adapts or risks being overthrown by disruptors (challengers). He said, "The gorilla is only a gorilla as long as it adapts. The moment it stops, it risks being replaced by a challenger."

Yet, being a disruptor may not be enough. A company must also have structural moats and scalability, something that is a defining characteristic of incumbents, "Scalability is the hallmark of a true gorilla," Sheths says, "These companies grow efficiently, with minimal incremental costs, making it nearly impossible for new players to match their scale."

Investor's corner

Sheth concludes, saying, "In the long run, only a few businesses dominate. Finding these gorillas and riding with them is what creates wealth."

To summarise, Sheth's gorilla investing strategy provides a valuable framework for discovering the market's dominant players. By exclusively focusing on the market's 'Legends' and 'Leaders', investors can identify businesses with the potential for long-term success.

However, adopting this strategy demands discipline, patience and a deep understanding of market dynamics. Gorilla investing isn't about chasing short-term success but seeking companies that have undergone multiple market cycles and still stand strong. Thus, gorilla investing can be an ideal roadmap if you want to invest in businesses that have shown robust long-term growth and delivered exceptional returns.

Also read: How Utpal Sheth changes the way you see investing mistakes

This article was originally published on December 24, 2024.