Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Friday 17 September 2010
Growth Stocks - When Should You Bank Your Profits?
Growth stocks can mean different things to different people, but I personally define a growth stock as being shares in a company that continues to increase both it's earnings and dividends each year (and has a long history of doing so). So with that in mind, I want to talk about when you should sell these stocks, because this is very important.
If you're lucky enough to have found some good quality growth stocks and are sitting on some decent profits, then it can be tempting to bank your profits and reinvest the proceeds elsewhere. However, as Warren Buffett will tell you, this isn't necessarily the best strategy.
The best strategy, provided that you're prepared to hold on to your shares for the long term, is to resist the temptation to sell and hold on for further gains. Yes there may be short-term fluctuations along the way, but providing that the company in question continues to increase both it's earnings and dividends each year, there is no need to sell because the share price will eventually rise to reflect this continued growth.
If you hold on to shares for as long as a company continues to grow and reinvest the dividends received each year, then you can be sure that you will be sitting on some substantial gains when you do finally decide to sell. This is something that Warren Buffett does to devastating effect. He simply looks for outstanding market-leading companies that continue to grow their profits each year, and holds on to these shares for years and years to benefit from both capital growth and dividends.
It requires a great deal of patience because in the short-term the share price can fall in line with the overall market, but in the long-term it rewards you with some fantastic profits. The difficulty is finding the right companies to invest in, but there are some obvious candidates amongst some of the large-cap stocks. For example here in the UK Tesco is a fantastic company because it has a long history of growing both it's earnings and dividends. Indeed I believe Buffett himself owns shares in Tesco at the time of writing.
So to answer the original question of when should you sell your shares in growth stocks, you should hold on to your shares for as long as possible to benefit from both capital growth and dividend reinvestment. The only time you should consider selling is when there is a danger that the company may stop increasing it's bottom line each year, maybe due to another major competitor gaining market share, for instance, because that will obviously mean that the share price is unlikely to continue rising in future years.
http://business.ezinemark.com/growth-stocks-when-should-you-bank-your-profits-1680a0ff66c.html
Friday 6 August 2010
How do you find stocks with a margin of safety?
Graham's advice to avoid growth stocks may be surprising. The reason is that great wealth is seldom achieved without growth stock investment, and Graham himself apparently amassed much of his fortune, while considerably enhancing his reputation, from a single growth stock. However, when Graham and his investment partners violated this principle, they controlled the firm and thus possessed inside knowledge of its affairs. Graham and partners held on to this stocks, too, because it had become "family business." In this case, they also violated Graham's often -stated admonition to be well diversified ; 20 percent of their funds initially went into this one stock. Still, Graham's disdain for growth stocks - because they are often popular, tend to become overpriced in good markets, and tend to perform poorly in bad markets - is well founded.
Wednesday 21 April 2010
****How to identify Growth Stocks? You should not try to identify a growth stock using financial ratios alone.
How to identify Growth Stocks?
The success of a business, and hence its growth, depends primarily on its customers. To find a great growth business, you need to evaluate it from a customer's point of view. Once you are satisfied that the company's sales and earnings will continue to grow and that you can buy the stock at a reasonable price, buy and hold it for a long time.
Here is an important lesson: How NOT to identify Growth Stocks?
Let's start with how NOT to identify a growth stock because it is especially important if you have been considering value investing.
You should not examine the financial fundamentals immediately after you have discovered a company that may grow in leaps and bounds for many years. Do not emphasize the fundamentals much.
- In other words, when you start thinking about a growth stock, do not start thinking about the historical P/E ratio or, for that matter, any other quantitative measure that you might have learned in business school.
- If you start thinking about traditional financial ratios, you will start thinking of value stocks, and you will probably never pick a great growth stock. You would never have picked shares in Microsoft, Wal-Mart, or Home Depot if you had looked at the fundamentals soon after the companies went public.
- Even if you knew these were incredible companies, you would have missed their tremendous potential.
We are not suggesting that traditional financial ratios are not important; we are simply suggesting that you should not try to identify a growth stock using financial ratios alone.
Thursday 15 April 2010
The QVM approach to finding promising Growth Stocks
VALUE: Before you buy a growth stock, you should consider the possibility that the price may already be reflecting a high growth potential. Evaluate its P/E ratio or, preferably, compute its intrinsic value.
MANAGEMENT: You will need to examine the qualitative variables, such as the quality of management and company culture, as they are the true underpinnings of future growth.
Overall, success in growth investing requires you to have
- a very good knowledge of the company's business and
- an ability to forecast its earnings well.
These most important determinants of your success in investing can be abbreviated as the QVM approach
Q = Quality - the quality of the company you own
V = Value - the price you paid for your stock
M = Management - the integrity of its management
Valuation of KNM and Sustainable Growth Companies
? 10 sen / share
A quick look at KNM
http://spreadsheets.google.com/pub?key=tnYPvXKu8my2Fsri8qR60oA&output=html
A related story:
One-time events that help grow companies for a short period usually affect prices significantly, but such changes are often temporary.
In the mid-1970s, again in the mid-1990s, and once again in the mid-2000s when oil prices went up quickly, many companies supplying oil-drilling services became high-growth companies. However, they could not sustain their growth.
For example, Global Marine, an otherwise well-managed company, was trading at around $35 per share in late 1997, but oil prices went down in 1998, and Global Marine's stock price quickly retreated to less than $8 per share.
A careful investor looking for an outstanding long-term growth company would have avoided Global Marine because the growth was from a one-time event.
It was and can be difficult to know which companies would have sustainable growth.
On the other side, note that at the time of going public, even Microsoft was not an outstanding growth stock because it was not clear that the company could sustain its growth. However, over time, it became clear that Microsoft's products were immensely successful. Microsoft was a near monopoly, and the number of customers for those products would increase for many years to come. At that point, it was a good growth stock worth investing in.
Monday 12 April 2010
****Buffett (1992): Do not categorise stocks into growth and value types, the two approaches are joined at the hip
- a low ratio of price to book value,
- a low price-earnings ratio, or
- a high dividend yield.
- a high ratio of price to book value,
- a high price-earnings ratio, and
- a low dividend yield
- Do not categorise stocks into growth and value types. A high P/E or a high price to cash flow stock is not necessarily a growth stock. A low P/E or a low price to cash flow stock is not necessarily a value stock either.
- Growth in profits will have little role in determining value. It is the amount of capital used that will mostly determine value. Lower the capital used to achieve a certain level of growth, higher the intrinsic value.
- There have been industries where the growth has been very good but the capital consumed has been so huge, that the net effect on value has been negative. Example - US airlines.
- Hence, steer clear of sectors and companies where profits grow at fast clip but the return on capital employed are not enough to even cover the cost of capital.
Thursday 25 March 2010
Peter Lynch's 6 categories of stocks: Asset Plays
GREG HOFFMAN
February 26, 2010
Over the past two weeks we've been on a tour of the way legendary US investor Peter Lynch classified stocks in his classic book, One up on Wall Street. Now, like the end of a game of Trivial Pursuit, we'll fill in the last piece of pie: asset plays.
The idea with asset plays is to identify untapped or unappreciated assets. These situations can arise for several reasons. A good historical example was Woodside Petroleum in the early part of this decade.
At the time, Woodside's annual profits didn't fully reflect its long-term earnings power. On 5 September 2003 (Long Term Buy - $13.40) our resources analyst enthused: ''It's hard to contain our excitement about the sheer quality of Woodside's assets, and we find dissecting the latest set of entrails (accounts) far less revealing than thinking about how things may play out at Woodside over the next five to 10 years or more.''
He was right, and those who followed his advice have so far more than tripled their money. Yet there was no magic involved. Woodside's enormous reserves and long-term contracts were there for all to see. But you needed to look past the then rather meagre profits and make an investment in the future potential of these assets.
''Recency bias''
It's easy to fall victim to ''recency bias'' in the sharemarket; placing far too much emphasis on the most recent financial results and not focusing on where a business is heading long term. Sometimes an asset play is plain enough to see but investors, for whatever reason, choose to ignore it. In the case of bombed-out SecureNet it was because everyone had sworn off ``tech stocks''.
On 26 July 2002 (Buy - $0.81), we pointed out that, ''SecureNet has an estimated $90-$92m cash in the bank, very little debt and 76m shares on issue. That means that were the company to return this cash to shareholders, each share would entitle the holder to about $1.18. That's 46% above the current market price. So, as long as the company isn't burning too much cash and management doesn't waste the money, at these prices it looks like a no-brainer.''
The company was taken over 12 months later by American group beTRUSTed at more than $1.50 per share, fully valuing the group's cash plus its IT security business. SecureNet was a classic asset play in the tradition of Benjamin Graham (author of our company's namesake, The Intelligent Investor in 1949).
Graham was a legendary investor and teacher (his most famous student being Warren Buffett) and, among other strategies, advocated buying stocks when they were available at less than their ''net cash assets'' (their cash balance less all liabilities) as SecureNet was.
RHG is a more recent example. Having steered our members clear of what proved to be a disastrous float, we ran the numbers as the stock price plummeted during the credit crisis and a clear picture began to emerge.
With a healthy portion of the group's multi-billion dollar loan book financed in the boom times by income-hungry funds at fixed margins, RHG was set to make hundreds of millions in profit as these loans were repaid. By our calculations, these profits would bring the group's total value to somewhere close to $1 per share.
At the depths of despair in June 2008, RHG shares changed hands for less than 5 cents each (several of our members report being happy buyers on that very day). That valued the company at less than $20m; an astonishing figure for a group that not two months later, would report a full year profit of $125m.
The stock now trades north of 60 cents and was a wonderful holding to have through early 2009 as it soared while most other stocks sank. And that's the beauty of a well-selected asset play; under the right circumstances it can offer a degree of protection to your portfolio.
Summing it up
That wraps up our practical introduction to Peter Lynch's six stock categories;
- slow growers,
- stalwarts,
- fast growers,
- cyclical,
- turnarounds and
- asset plays.
The biggest risk for investors is mis-categorising a stock. Buying a stock which you think is a fast grower, for example, only to find out a couple of years down the track that it is really a cyclical, is a chastening experience. And your own life situation and risk tolerance should dictate the weightings of each category in your portfolio.
If you've found these distinctions helpful, you might find it worthwhile heading to the source, Lynch's easy-to-read One Up on Wall Street, which is number two on the reading list we provide to members of The Intelligent Investor when they first join up.
Next week I'll take you through some of the other books on that list. They're a great education.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor which provides independent advice to sharemarket investors
http://www.businessday.com.au/business/asset-plays-the-last-piece-in-the-puzzle-20100226-p7lc.html
Peter Lynch's 6 categories of stocks: Turnaround Stocks
GREG HOFFMAN
February 24, 2010
In this fourth instalment of a five-part series, we'll examine turnarounds; a category beginner investors should be very careful of.
Like ice cream, turnarounds come in many varieties. The mildest form is the ''little-problem-we-didn't-anticipate'' kind of turnaround typified by Brambles' loss of 15 million pallets in Europe a few years ago.
Another is Aristocrat Leisure, which I recommended to The Intelligent Investor's members in June 2003 at $1.15 with the following quotes, fittingly, from Peter Lynch: ''Turnaround stocks make up lost ground very quickly'' and ''the occasional major success makes the turnaround business very exciting, and very rewarding overall.''
While I'm proud to have steered members into this great stock in its darkest days, I recommended people begin taking money off the table far too early in the turnaround process, beginning in March 2004 at $2.73 having recorded a gain of ''only'' 137%, when much more was to come. Thankfully we were recently given another bite at the cherry (as I explained in Betting on prosperous times).
Perfectly good company
Another category of turnaround is the perfectly-good-company-inside-a-troubled-one. I missed AMP in its ''lost years'', because I wasn't comfortable enough with the complexities of life insurance accounting to take the plunge. But Miller's Retail (now Specialty Fashion Group) provided an opportunity at its 2005 nadir, with progress in its women's apparel business being clouded by problems in its discount variety division.
Those brave enough to draw breath and buy the stock when I upgraded in May 2005 at 68.5 cents per share were rewarded with a 148% return in just 10 months before we sold in March 2006 at $1.70 (although the stock had provided a painful ride down prior to its relatively sudden resurrection).
Potential fatalities are probably the most uncomfortable type of turnaround. They can be explosive on both the up- and down-side.
My analysis of timber group Forest Enterprises on 8 March 2002 (Speculative Buy - $0.12) began: ''This company could go broke. But we're about to recommend you buy some shares in it.''
It may shock you that a conservative service like The Intelligent Investor could ever recommend a stock which has a significant chance of going to zero. But if the profit potential is large enough, and the percentage chance of it materialising is great enough, then we're prepared to risk a prudent percentage of our portfolios in a potential wipe-out situation.
Probability is the key
The key to turnarounds is to think about them in terms of probabilities. With Forest Enterprises back in March 2002, my probability calculation would have looked something like the accompanying table. (see below)
The stock ran even further after I recommended our members sell at 35 cents in April 2004, but that advice to sell quoted the words of famed American financier Bernard Baruch: ''Don't try to buy at the bottom and sell at the top. It can't be done except by liars.'' We were content with a near tripling of our initial outlay in just over two years.
The Intelligent Investor's sell-side record is a bit embarrassing on these turnarounds - tending to sell far too early. But buying is by far the riskiest part. Get one of these investments wrong and you could well be staring at a financial fatality - a ''bagel'', in the parlance of Wall Street.
Don't worry, though. You can live a rich and rewarding investing life without ever going near a turnaround situation in the sharemarket. You could also say the same about the final stock category we'll turn to on Friday: Asset plays. But asset plays appeal to a certain type of investor (I, for one, love 'em) and can offer great returns often with a good deal of underlying protection.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor which provides independent advice to sharemarket investors.
http://www.businessday.com.au/business/markets/turnaround-stocks-the-pleasure-and-pain-20100224-p2pt.html
Thursday 11 March 2010
Stock Picking Strategy- The Parameters That One Needs To Look At
When investing in stocks, an investor needs to be aware of what they are putting themselves into. This is to say that, they should have the facts right about the securities they hope to invest in. Stocks, in this case, come in many characteristics and an investor needs to be fully aware of their behaviour before committing their money. A characteristic of stocks is that, they are those that are value-oriented and others are growth oriented.
Value oriented stocks are those that are trading at a price that is lower than what they are really worth. An investor buys them with the hope that, the price will rise above the stocks worth and that, they will then realize a profit, hence adding value to their investment. On the other hand, the growth oriented stocks are focused on future prices. They look at the potential of the company, and not necessarily the securities.
Under the growth stocks, there are those that grow faster than others and it is upon the investors to find to more about them. There is no laid out formula as to how the stocks experience growth, but the growth is based on speculation. As an investor chooses to look at growth as a stock picking strategy, they should first make an observation of how they have performed in the past.
Another stock picking strategy that an investor may chose to adopt is the income factor. As we can see, there are value and growth stocks and income stocks as well. Stocks that generate dividends are popular among many people today. Many investors have preference over high yield stocks, or those that guarantee them a steady income.
http://www.stockmarket-results.com/stocks/stock-picking-strategy-the-parameters-that-one-needs-to-look-at/comment-page-1
Sunday 21 February 2010
****Growth stocks as a class has a striking tendency toward wide swings in market price (II)
But is it not true, that the really big fortunes from common stocks have been garnered by those
- who made a substantial commitment in the early years of a company in whose future they had great confidence and
- who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?
The answer is "Yes."
Click to see:
10 Year Price Chart of Top Glove
But the big fortunes from single company investments are almost always realised by persons who have a close relationship with the particular company - through employment, family connection, etc. - which justifies them
- in placing a large part of their resources in one medium and
- holding on to this commitment through all vicissitudes, despite numerous temptations to sell out at apparently high prices along the way.
5 Year Price Chart of Top Glove
2 Year Price Chart of Top Glove
1 Year Price Chart of Top Glove
6 month Price Chart of Top Glove
3 Month Price Chart of Top Glove
1 Month Price Chart of Top Glove
An investor without such close personal contact will constantly be faced with the question of whether too large a portion of his funds are in this one medium.
Click to see:
5 Year Price Chart of Top Glove
2 Year Price Chart of Top Glove
1 Year Price Chart of Top Glove
6 month Price Chart of Top Glove
3 Month Price Chart of Top Glove
1 Month Price Chart of Top Glove
Each decline - however temporary it proves in the sequel - will accentuate his problem; and internal and external pressures are likely to force him to take what seems to be a good profit,
Click to see:
5 Year Price Chart of Top Glove
2 Year Price Chart of Top Glove
1 Year Price Chart of Top Glove
6 month Price Chart of Top Glove
3 Month Price Chart of Top Glove
1 Month Price Chart of Top Glove
but one far less than the ultimate bonanza.
Click to see:
10 Year Price Chart of Top Glove
Comments:
- Be a good stock picker.
- Think as a business owner.
- Always look at value rather than the price. Do the homework.
- Buy and hold is alright for selected stocks.
- Compounding is your friend, get this to work the magic for you.
- Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
- Always buy a lot when the price is low. Doing so locks in a higher potential return and minimise the potential loss. But then, if you have confidence in your stock picking, you would have picked a winner - it is only how much return it will deliver over time.
- Never buy when the stock is overpriced. Not observing this rule will result in loss in your investing. This strategy is critical as it protects against loss.
- It is alright to buy when the selected stock is at a fair price.
- Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the the price is still obviously too high.
- Do not time the market for such or any stocks. Timing can increase returns and similarly harms the returns from your investment. It is impossible to predict the short term volatility of the stock, therefore, it is better to bet on the long-term business prospect of the company which is more predictable.
- By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
- So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
- The downside risk is protected through only buying when the price is low or fairly priced. Therefore, when the price is trending downwards and when it is obviously below intrinsic value, do not harm your portfolio by selling to "protect your gains" or "to minimise your loss." Instead, you should be brave and courageous (this can be very difficult for those not properly wired) to add more to your portfolio through dollar cost averaging or phasing in your new purchases. This strategy is very safe for selected high quality stocks as long as you are confident and know your valuation. It has the same effect of averaging down the cost of your purchase price. However, unlike selling your shares to do so, buying more below intrinsic value ensures that your money will always be invested to capture the long term returns offered by the business of the selected stock.
- Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations. Tactical dynamic asset allocation or rebalancing involves selling at the right price and buying at the right price based on valuation. Assuming you can get your buying and your selling correct 80% of the time;, to get both of them right for a profitable transaction is only slightly better than chance (80% x 80% = 64%). Except for the extremes of the market, for most (perhaps, almost all of the time), for such stocks, it is better to stay invested (buy, hold, accumulate more) for the long haul.
- Sell urgently when the company business fundamental has deteriorated irreversibly. (Reminder: Transmile)
- You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 14, you can do so leisurely.
- In conclusion, a critical key to successful investing is in your stock picking ability. To be able to do so, you will need to acquire the following skills:
- To formulate an investing philosophy and strategy suitable for your investing time horizon, risk tolerance profile and investment objectives.
- The knowledge to value the business of the company.
- The discipline to always focus on value.
- The willingness to do your homework diligently.
- A good grasp of behavioural finance to understand your internal and external responses to the price fluctuations of the stock in the stock market.
- A good rational thinking regarding the risks (dangers) and rewards (opportunities) generated by the price fluctuations of the stock in the stock market.
Acquired 14/2/2007 34,540,661 (Bonus issue)
Disposed 6/4/2007 6,300,000
Acquired 9/5/2007 1,000,000
Acquired 22/6/2007 500,000
Acquired 12/7/2007 438,900
Acquired 18/7/2007 403,900
Acquired 25/7/2007 157,200
Acquired 12/9/2007 200,000
Acquired 18/9/2007 580,000
Acquired 24/3/2008 50,000
Expiration of ESOS-options 29/4/2008
(The only ESOS-option not converted and expired were those noted on 29/4/2008. After this date, Mr. Lim continued to convert ESOS-options at regular intervals and did not buy or sell other shares of his company. The large sale of shares in 6/4/2007 followed the large bonus issue Mr. Lim acquired on 14/2/2007.)
Click to see:
5 Year Price Chart of Top Glove
10 Year Price Chart of Top Glove
From the price chart of Top Glove, we can draw the following points:
The price of Top Glove peaked at around $14 at the beginning of January 2007.
It dropped to around $9 in February 2007.
In April 2007, the price was around $9.20 when Mr. Lim sold 6,300,000 shares; he did not sell at the highest price possible.
In May 2007, the price was around $8.95, Mr. Lim bought back 1,000,000 shares.
The share price continued dropping to $6.00 in September 2007; Mr. Lim bought back 580,000 shares.
Mr. Lim continued to buy from May 2007 to September 2007 a total of 2.9 million shares.
It was obvious that even Mr. Lim phased-in his buying of the shares at various prices, rather than timing the buying of his shares at the lowest price.
****Growth stocks as a class has a striking tendency toward wide swings in market price (I)
Click to see:
1 Year Price Chart of Top Glove
2 Year Price Chart of Top Glove
5 Year Price Chart of Top Glove
The main characteristic of the stock market in the last few decades has been the injection of a highly speculative element into the shares of companies which have scored the most brilliant successes, and which themselves would be entitled to a high investment rating. (Their credit standing is of the best, and they pay the lowest interest rates on their borrowings.)
The investment caliber of such a company may not change over a long span of years, but the risk characteristic of its stock will depend on what happens to it in the stock market.
But is it not true, that the really big fortunes come from common stocks that have been garnered by those who made a substantial commitment in the early years of a company in whose future they had great confidence, and who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?
Click to see:
10 Year Price Chart of Top Glove
Friday 12 February 2010
Growth Stocks and the Defensive Investor
Some authorities would say that a true growth stock should be expected at least to double its per-share earnings in 10 years, that is, to increase them at a compound annual rate of over 7.1%.
Obviously stocks of this kind are attractive to buy and to own, provided the price paid is not excessive.
The problem lies there, of course, since growth stocks have long sold at high prices in relation to current earnings and at much higher multiples of their average profits over a past period. This has introduced a speculative element of considerable weight in the growth stock picture and has made successful operations in this field a far from simple matter.
In the past, the "best of common stocks" actually lost 50% of its market price in a 6 months' market decline.
Other growth stocks have been even more vulnerable to adverse development; in some cases not only has the price fallen back but the earnings as well, thus causing a double discomfiture for those who owned them.
For example, a particular stock price advanced 5 times (from $5 to $256 i.e 50x) as fast as the profits (from 40 cents to $3.91 per share i.e. 10x); this is characteristic of popular common stocks. Two years later, the earnings had dropped off by nearly 50% and the price by 80%.
For growth stocks, wonders can be accomplished with
- the right individual selections,
- bought at the right levels, and
- later sold after a huge rise and
- before the probable decline.
But the average investor can no more expect to accomplish this. In contrast, Benjamin Graham think that the group of large companies that are
- relatively unpopular and
- therefore obtainable at reasonable earnings multipliers,
- offers a sound if unspectacular area of choice by the general public.
Ref:
Intelligent Investor
by Benjamin Graham
Sunday 24 January 2010
Market Multiple or "What the market is selling for".
Here are some pointers about P/Es.
If you take a large group of companies, add their stock prices together, and divide by their earnings, you get an average P/E ratio.
On Wall Street, they do this with the Dow Jones Industrials, S&P 500 stocks and other such indexes. The result is known as the "market multiple" or "what the market is selling for."
- The market multiple is a useful thing to be aware of, because it tells you how much investors are willing to pay for earnings at any given time.
- The market multiple goes up and down, but it tends to stay within the boundaries of 10 and 20.
- The stock market in mid-1995 had an average P.E ratio of about 16, which meant that stocks in general weren't cheap, but they weren't outrageously expensive, either.
In general, the faster a company can grow its earnings, the more investors will pay for those earnings.
- That's why aggressive young companies have P/.E ratios of 20 or higher. People are expecting great things from these companies and are willing to pay a higher price to own the shares.
- Older, established companies have P/E ratios in the mid to low teens. Their stocks are cheaper relative to earnings, because established companies are expected to plod along and not do anything spectacular.
Some companies steadily increase their earnigns - they are the growth companies.
Others are erratic earners, the rags-to-riches types. They are the cyclicals -
- the autos, the steels, the heavy industries that do well only in certain economic climates.
- Their P/E ratios are lower than the P/.Es of steady growers, because their perfomance is erratic.
- What they will earn from one year to the next depends on the condition of the economy, which is a hard thing to predict.
Tuesday 19 January 2010
Growth stocks regain favor after value's long run
Growth stocks regain favor after value's long run
Mark Jewell
Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
There's no pat definition for growth stocks, but typically they generate revenue and earnings at an above-average rate. Examples are Apple and Google. Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade. Also, value stocks normally do much better coming out of a recession, as more economically sensitive stocks like banks and utilities rebound at the earliest signs that the economy is expanding.
"Typically, the bigger the contraction during a recession, the bigger the snapback when the economy turns," says Stephen Wood, chief market strategist of Russell Investments. "That hasn't happened this time."
This recovery has been tepid. The economy is growing about half as fast as it usually does exiting a recession, says Wood. Though the stock market has climbed 70 percent since last March, unemployment remains at 10 percent.
Still it's clear that growth stocks were hot in 2009. Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
The reality is that certain industries play a pivotal role in driving the performance of growth and value stocks.
Tech stocks are the biggest part of growth, accounting for 30 percent of the value of all that category's stocks in the Russell 3000. Last year those tech stocks finished up an average 59 percent — tops among 11 sectors — boosting growth's overall performance. Two of tech's biggest names put up especially strong results: Shares of Apple and Google more than doubled.
On the value side, financial services stocks are the biggest piece, making up one-quarter of the Russell 3000's value component. While many large banks came back from the brink of failure, their stocks haven't returned to pre-plunge levels. In 2009, financials trailed the broader market despite finishing up 17 percent.
Utility stocks, another value staple, also weighed down the overall performance of the category. They gained just 12 percent last year, less than any other segment of the stock market.
Ultimately, investors trying to forecast whether growth or value will lead the market should closely watch the economy.
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
That's because growth companies' competitive advantages — think of Google's search engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy, or energy companies that see demand from industrial customers shrink.
When the economy began expanding coming out of past recessions, value stocks began rising faster than growth stocks, the study found.
That's not the case now, so the current market is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://www.realclearmarkets.com/news/ap/finance_business/2010/Jan/15/growth_stocks_regain_favor_after_value_s_long_run.html
Growth stocks regain favor after value's long run
Growth stocks regain favor after value's long run
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
The Associated Press
BOSTON — Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
Typically growth stocks generate revenue and earnings at an above-average rate. Examples are Apple and Google.
Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
Historical patterns
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade.
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
Advantage holds up
That's because growth companies' competitive advantages — think of Google's search-engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy.
When the economy began to expand coming out of past recessions, value stocks began to rise faster than growth stocks, the study found.
But the market now is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://seattletimes.nwsource.com/html/businesstechnology/2010797412_investgrowth17.html?syndication=rss
Monday 7 September 2009
Philip Fisher: Growth Stock Investigator
Legendary Investor
Philip Fisher: Growth Stock Investigator
Matthew Schifrin, 02.23.09, 06:00 PM EST
His idea of buying growth stocks and holding them forever sounded good--even to Warren Buffett.
Philip Fisher
Who was Philip Fisher?
Most Forbes readers are familiar with Ken Fisher, money manager billionaire and longtime Portfolio Strategy columnist in Forbes magazine. However, what isn't as widely known among younger investors is that Ken Fisher comes from investing royalty. His father was Philip Fisher, who, starting in 1931, ran a small Northern California investment counseling firm. In 1958, Phil Fisher wrote the first investment book ever to make The New York Times bestseller list, Common Stocks and Uncommon Profits. It also became required reading in the investments class at Stanford's Graduate School of Business (where Phil taught for a time).
The book laid out senior Fisher's 15-point strategy for finding great long-term growth stocks at a time when most investors and strategies swung with business cycles. His methods were so convincing that a young Warren Buffett went to visit with Fisher and eventually incorporated a good deal of Fisher's methods into his own stock selection process. Buffett later described his strategy as 15% Fisher and 85% Benjamin Graham.
As Ken Fisher recounts in the forward to his father's classic investment tome, his father was a bit impatient and the young Fisher only worked at his father's firm briefly. But Fisher went on hundreds of company visits with his father in the 1970s and absorbed his father's investigative style of investing. Still, young Fisher's response to people who would often ask him which experience with his father was his favorite was, "The next one."
Ken's strategy, which focuses largely on stocks undervalued according to their price-to-sales ratios, is much more straight value in it's approach. He seeks stocks that are cheap because they have an undeserved bad image. His father, who wrote his book during a time of great prosperity that resulted in a long post-World War II bull market, wanted stocks he could hold forever because they were well managed and would continue to grow. In fact, by the time Philip Fisher died at the age of 96 in 2004, he still held shares of Motorola (nyse: MOT - news - people ) that he had purchased 21 years earlier. The stock had appreciated more than 20-fold versus a seven-fold appreciation of the S&P 500.
Phil Fisher's 15-point approach essentially attempts to determine whether a company is in a position to continue to grow sales for several years, has an innovative and visionary management, strong profit margins, effective sales organization and high-quality management. Fisher also argued against over-diversifying and, in his heyday, tended to hold only about 30 stocks. This is one of the Buffett strategies borrowed from Fisher as was his don't follow the crowd approach.
Not insignificant in Fisher's approach to growth stock investing was something he called "scuttlebutt." This was the process of veering from printed financial stats or company disclosures. Fisher felt strongly that investors should "investigate" potential portfolio holdings by questioning customers, competitors, former employee's and suppliers, as well as getting information from management itself. The art to this was not just in the answers Fisher got, but in asking the right questions.
Thanks to help from the American Association of Individual Investor's Stock Investor Pro software, Forbes.com recently created a Philip Fisher screen. Below are the criteria used and 10 stocks that passed our Fisher test. Of course, true Phil Fisher devotees will need to do the "scuttlebutt" part of the analysis on their own.
*Net profit margin for the last 12 months and each of the last five fiscal years is greater than the industry's median net profit margin for the same period.
*Sales have increased on a year-to-year basis over each of the last three years (Y4 to Y3, Y3 to Y2, Y2, to Y1) and over the last 12 months (Y1 to 12 months).
*The three-year growth rate in sales is greater than or equal to the industry's median sales growth rate over the same period.
*The company is not expected to pay a dividend in the next year (indicated dividend is zero).
*The ratio of the current price-earnings ratio to the estimated growth rate in earnings per share (PEG ratio) is greater than 0.1 and less than or equal to 0.5.
Company Business
Price Market Cap Five-year PEG Ratio Five-Year Sales Growth Net Profit Margin
America Movil (nyse: AMX - news - people ) Communications Services
$31.05 $53.5 billion 0.2 39.1% 31.2%
NII Holdings (nasdaq: NIHD - news - people ) Communications Services
$20.56 $3.4 billion 0.9 33.4% 11.6%
Inverness Medical Innovations (amex: IMA - news - people ) Biotechnology & Drugs
$25.09 $2.0 billion 32.3% -4.2%
Sohu.com (nasdaq: SOHU - news - people ) Computer Services
$45.61 $1.8 billion 0.2 45.8% 31.4%
General Cable (nyse: BGC - news - people ) Communications Equipment
$19.61 $1.0 billion 26% 3.9%
Arena Resources (nyse: ARD - news - people ) Oil & Gas Operations
$26.8 $1.9 billion 0.1 125.9% 37.6%
EZCORP (nasdaq: EZPW - news - people ) Retail (Specialty Non-Apparel)
$13.87 $599.3 million 0.3 17.3% 11.5%
Cabela's (nyse: CAB - news - people ) Retail (Specialty Non-Apparel)
$6.32 $421.4 million 0.6 13.9% 3.2%
Team (nasdaq: TISI - news - people ) Business Services
$16.49 $310.5 million 0.3 39.1% 5.2%
Volcom (nasdaq: VLCM - news - people ) Apparel/Accessories
$9.52 $232.0 million 0.2 36.3% 11.2%
Continucare (amex: CNU - news - people ) Health Care Facilities
$1.96 $117.2 million 0.3 21.2% 5%
Source: AAII Stock Investor Pro.
http://www.forbes.com/2009/02/23/philip-fisher-growth-personal-finance_philip_fisher.html
What Does Growth Stock Mean?
What Does Growth Stock Mean?
Shares in a company whose earnings are expected to grow at an above-average rate relative to the market.
Also known as a "glamor stock".
Investopedia explains Growth Stock
A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects. Most technology companies are growth stocks.
Note that a growth company's stock is not always classified as growth stock. In fact, a growth company's stock is often overvalued.
http://investopedia.com/terms/g/growthstock.asp
Monday 27 July 2009
Growing with growth stocks
Growing with growth stocks
Tags: Ang Kok Heng
Written by Ang Kok Heng
Monday, 27 July 2009 00:26
AXIATA Group Bhd, formerly TM International Bhd (6888), will cap capital expenditure (capex) at RM4.4 billion this year, in a move to cut costs amid a slowdown in the region's economies. "There are a few things we are doing given the economic situation — we are reducing capex from RM5.4 billion to RM4.4 billion, re-looking all operating costs and benchmarking ourselves to know where we stand," Axiata president and managing director Datuk Seri Jamaludin Ibrahim said.
Malaysia's third-placed mobile operator DiGi Telecommunications is planning to spend more than RM1.1 billion (US$318.9 million) in 2009, Reuters reports.
PPB GROUP BHD [] is planning to spend RM293 million on capex this year, its chairman Datuk Oh Siew Nam said. He said the group's flour-making subsidiary FFM Bhd, has been allocated RM173 million to build new flour mills in Kota Kinabalu, Sabah, and Jakarta, Indonesia.
Food-based QL RESOURCES BHD [] has earmarked RM280 million as capex for its current fiscal year and the next, deemed pivotal to spur its regional merger and acquisition (M&A) plans, and to improve its manufacturing facilities. Some RM130 million and RM150 million are allocated for the financial years (FY) ending March 2010 and 2011, respectively.
TA ANN HOLDINGS BHD [] plans to spend up to RM189 million in 2009, with most of the money going into oil palm PLANTATION []s, group managing director and chief executive officer Datuk Wong Kuo Hea said
TOMEI CONSOLIDATED BHD [] has budgeted about RM10 million for capex this year in a bid to expand amid the economic slowdown, the jeweller's group managing director Ng Yih Pyng said. "The amount allocated will be used mainly for our outlet expansion and also to improve our information TECHNOLOGY [] (IT) system," he told StarBiz in an interview.
Top Glove Corp Bhd chairman Tan Sri Dr Lim Wee-Chai said the group had allocated some RM80 million for capex, which would include organic expansion and potential acquisitions. TENAGA NASIONAL BHD []'s capex this year amounted to RM3.75 billion to RM4 billion, lower than RM4.5 billion previously. UMW HOLDINGS BHD [] plans some RM600 million in capex this year to beef up its oil and gas (O&G) business, according to managing director and chief executive officer Datuk Dr Abdul Halim Harun.
The capex planned by companies is mainly for future expansion. It is this capex that generates business and hence earnings growth for a company. Earnings growth is the main attraction in equity investment.
Stock grows
One of the main duties of the management is to grow the company. When a company is operating at full capacity, additional capex is needed to grow the earnings. The funds for capex could be internally generated or from borrowed capital. This type of reinvestment is the yearly expansion budget of a company. Every incremental investment will provide additional return which will add to the existing profit of a company.
Some companies may be faced with diminishing return which occurs when profitability falls over time either because of more competition or less lucrative investment return. So long as the return on investment (ROI) is higher than the bank's interest rates, there is value added from the expansion plan.
But the ROI of most investments is expected to be much higher than the bank's interest rates since every investment comes with a certain amount of risk. When ROI is substantially higher than borrowing rates, it will make sense to borrow to enhance business returns. Every capex may be viewed individually from the ROI point of view such that the return must be worth the effort and risk taken. In many cases, the return may not be immediate and some may even suffer losses for the initial few years before profit starts to flow in.
Growth stocks pay less dividends
Because of the need to grow, growth stocks normally pay less on dividends so that a larger portion of the profit is retained for future expansion. The amount of dividend paid to shareholders as a percentage of the profit is known as dividend payout ratio. The dividend payout of a growth stock could be less than 50% while some may be as low as 20%.
Generally, a stock with low dividend payout and low dividend yield is expected to have higher earnings growth. On the other hand, a stock with high dividend payout and thus high dividend yield has lower earnings growth. In this way, growth stocks tend to have higher price appreciation than high-dividend yield stocks.
It is not uncommon to come across management's explanation to its shareholders on the reasons for keeping some of the profit for future expansion. As every company has its own expansion plans, the company usually conserves some cash for future use and pay the balance to shareholders. In this way, there is no need to raise money from shareholders via rights issues for expansion purposes.
In certain cases, although the company may post profit, it may not have sufficient free cashflow to pay dividend, as the profit is just an "accounting profit". In this case, the "profit" is tied up in inventories or receivables and hence it cannot be paid to shareholders. A good company is one which can pay relatively high dividends and yet able to continue to provide reasonable growth.
More capex, higher growth
There are also many listed companies which did not pay high dividends and yet their earnings growth was mediocre. If the capex is not well spent, the earnings growth may not be forth coming. Although failed projects may not be entirely the fault of the management, a good manager should also avoid or minimise such losses.
More importantly bad investment should not be repeated. Unfortunately, it is not uncommon to see several companies listed on Bursa Malaysia which did not seem to get any of their investment strategies right year after year. The poor ROE (return on equity or shareholders' fund) in the past and non-improvement in ROE over the years prove the failures of the management to deliver basic economic profit to shareholders.
At the beginning of this article, several companies disclosed their capex requirements for the year. For a growth stock, the capex is likely to be higher relatively to its size. For the selected companies, we have listed them in Table 1. We have divided the capex by market capitalisation (a measure of value of a company) and also by fixed assets. Although these ratios may not be conclusive to determine which stock is a better growth stock, they provide some ideas on the expansion plans.
It should be noted that the low capex of a company in a particular year may not necessarily denote lower earnings growth going forward. It could be due to the adequate capacity for the time being or less need to expand due to the prevailing market conditions. Some companies may not be capital intensive and hence less need to spend as much.
Expansion path
Listed companies have many options to grow. They can grow organically through natural expansion or by way of acquisition. The growth can be financed by internally generated funds, borrowing or a combination of both. They may also issue new shares to acquire the target company or call for rights issues to finance the expansion (see Chart 1).
It is not uncommon for a company to move downstream by adding value to what it produces, for example, to process its products further. It can also go upstream to procure its own raw materials so as to be in a better position to control its supplies. A company facing limited growth in its existing business may also venture into new businesses to remain relevant. This type of diversification can also be useful to stabilise the cyclical business nature of a company.
Capital gain can be volatile
From an investor's perspective, the ROI is the dividend income received regularly and the capital gain from price appreciation.
For a high-dividend stock, the dividend yield is similar to assured return received, say 4% per annum. The capital gain, normally smaller for a high- dividend stock, is like a bonus on top of the dividend.
For growth stock, the dividend yield is smaller (see Chart 2) and capital gain is what an investor mainly aims for. Unfortunately, capital gain can be very volatile, since the share price could be influenced by market sentiment. Furthermore, as the business risk of a high-growth company is normally higher, the expected price appreciation will depend on the results of the expansion plan. Most investments provide both income and capital gain. Examples are unit trusts, bonds, PROPERTIES [] and foreign currencies.
There are also several investments which do not provide income. These are merely trading instruments. They include commodity trading, gold and similar types of commodity which bet purely on the price appreciation. Investors who "invest" in gold thinking that this is a good investment, must bear in mind that gold does not provide income, it only provides capital gain (or speculative gain). A kilogramme of gold remains a kilo after several years. A growth stock (provided it is a true growth stock and not speculative stock), on the other hand, will grow over time and will not be the same after several years.
Fixed-income instruments don't grow
Most investment grade stocks provide some growth. Even a low-growth high-dividend yield stock may have small growth. If the growth is only 2% per year, the dividend received is also likely to grow by 2% per annum. In this example, assuming the dividend yield is 4% per annum, a 2% growth in dividend will mean that after five years, the dividend yield will increase to 4.4%. As such, growth does make a difference in the return.
In the case of fixed-income instruments such as fixed deposits (FD) with the bank, the FD rate is fixed during the period of placement. If a one-year FD yields 3%, it is 3%. If the interest rate remains the same, the same FD will continue to give 3% return the following year.
While interest rate may go up one year later after the FD matures, it may possibly go down as well. There is no growth factor in FD placement. Some may argue that the growth in savings from interest rate is compounding. The compounding effect by reinvesting the interest earned is similar to the compounding effect achieved by reinvesting the dividend earned in the case of investing in a high-yield stock which may still provide some growth.
Some stocks don't grow
While investing in FD is a constant yield investment, there are also many stocks which don't grow over time. Unfortunately, the earnings of many stocks listed on Bursa Malaysia are very sluggish and they don't seem to increase even after ten years. It is a disappointing fact. These companies remain more or less the same after one or two rounds of the economic cycle. They seem to struggle with the same business year in year out.
Investing in non-growth stocks is like investing in FD with the same yield. The only difference is that non-growth stocks usually do not provide high dividend as they are not well-managed and hence their operating cashflow may not be stable. The lack of confidence to generate sufficient and consistent cashflow prevents these companies from paying higher dividend.
Some stocks degrade like their retiring owners
One of the reasons why some companies degrade and show stagnant earnings is the lost of drive (the oomph!) when the key promoters retire or on the verge of retiring. The lack of successors either among the owners' scion or from other professionals could not propel the companies forward. In some cases, the children who took over the businesses were not as capable as the founders were. As a result, these successors acted merely like a caretaker. Not only were they not able to grow the business, some of them were not even able to defend the companies' market shares.
Investing in non-growth stocks is already bad, investing in negative-growth stocks is even worst.
Investment provides yields and capital gains
In short, investment provides yields and capital gains. Some investments like FD provide pure yields but no growth at all. Some investments like gold and commodities only provide capital gains but not income. Pure capital gain investment is more speculative in nature and is not suitable for the buy-and-hold strategy. Trading strategy is more appropriate for this type of investment and market timing is crucial. Many other investments provide both yield and capital gain.
Yields are like a bird in hand and capital gains are like birds in the bushes. Some capital gains are easier to anticipate, while some capital gains are less predictive.
Ang has 20 years' experience in research and investment. He is currently the chief investment officer of Phillip Capital Management Sdn Bhd.
http://www.theedgemalaysia.com/business-news/129607-growing-with-growth-stocks.html
Friday 12 June 2009
Value Stocks and Superior Returns
Stocks that exhibit low P/B and low PE ratios are often called value stocks.
Those with high PE and P/B ratios are called growth stocks.
Prior to the 1980s, value stocks often were called cyclic stocks because low PE stocks often were found in industries whose profits were tied closely to the business cycle. With the growth of style investing, equity managers who specialised in these stocks were uncomfortable with the cyclic moniker and greatly preferred the term value.
- Value stocks are concentrated in oil, motor, finance and most utilities.
- Growth stocks are concentrated in the high-technology industries such as drugs, telecommunications, and computers.
- Of the 10 largest U.S. based corporations at the end of 2001, 7 can be regarded as growth stocks (GE, Microsoft, Pfizer, Wal-Mart, Intel, IBM, and Johnson & Johnson), whereas only 2 (Exxon Mobil and Citigroup) are value stocks; AIG can go either way depending on the criteria used for selection.
A study summarising the compound annual returns on stocks from 1963 through 2000 ranked on the basis of both capitalization and book-to-market ratios appear to confirm Graham and Dodd's emphasis on value-based investing.
- Historical returns on value stocks have surpassed those of growth stocks, and this outperformance is especially true among smaller stocks.
- The smallest value stocks returned 23.26% per year, the highest of any of the 25 categories analysed, whereas the smallest growth stocks returned only 6.41%, the lowest of any category.
- As firms become larger, the difference between the returns on value and growth stocks becomes much smaller.
- The largest value stocks returned 13.59% per year, whereas the largest growth stocks returned about 10.28%.
Another more economically based reason is that value stocks have higher dividends, and dividends are taxed at a higher rate than capital gains. As a result, value stocks must have higher returns to compensate for their higher taxability. However, tax factors cannot explain the wide spreads between small value and growth stocks.
The differences in the return between large growth and large value stocks appears to wax and wane over long cycles.
- Growth stocks gained in the late 1960s and peaked in December 1972, when the "nifty fifty" hit their highs.
- When investors dumped the nifty fifty, growth stocks went into a long bear market relative to value stocks. One of the reasons for this was the surge in oil stocks, which are classified as value stocks, when OPEC caused petroleum prices to soar.
- From 1982 onward, growth stocks gained relative to value stocks, soaring in the technology boom of 1990-2000, only to fall again when the euphoria subsided.
- In fact, large growth stocks have outperformed large value stocks in about half the years since 1963.
BARRA, Inc., a California-based stock research firm, has divided the firms in the S&P 500 Stock Index into two groups of growth and value stocks with equal value on the basis of the firm's market-to-book ratio. Using the ratio of the cumulative return on these two large capitalization growth and value indexes since Dec 31, 1974, when the indexes were first formulated:
- On the basis of capital appreciation alone, growth stocks, with a 11.06% annual return, beat value stocks by 0.31% over this 37-year period.
- However, these value stocks have dividend yields that are about 2 % above that of growth stocks. When dividend yields are included to find total cumulative returns, value stocks' return of 15.6% per year outperformed growth stocks by about 1.9%.
- However, for taxable investors, the difference between the cumulative returns on S&P growth and value stocks has been very slight over the past 27 years, a difference of only 0.69%.
- For someone who began investing in 1975, the technology bubble of the late 1990s sent after-tax growth returns higher than after-tax value returns from September 1999 through September 2000.
- Once the bubble popped, however, growth stock returns fell back below those of value stocks very quickly.
- Large value stocks crushed large growth stocks from 1975 through 1977, when soaring oil prices sent the price of oil and resource firms (which are always ranked as value stocks) skyrocketing.
- Since August 1982, when the great bull market began, cumulative returns for growth and value investors have been almost identiacal, even after the growth stock collapse of 2000-2001.
Also read:
Nature of Growth and Value Stocks
Nature of Growth and Value Stocks
These designations are not inherent in the products the firms make or the industries they are in. The terms depend solely on the market value of the firm relative to some fundamental variable, such as earnings, book value, etc.
The stock of a producer of technology equipment, which is considered to be an industry with high growth prospects, actually could be classified as a value stock if it is out of favor with the market and sells for a low market-to-book ratio.
Alternatively, the stock of an automobile manufacturer, which is a relatively mature indsutry with limited growth potential, could be classified a growth stock if its stock is in favor.
In fact, over time, many stocks go through value and growth designations as their market price fluctuates.
The literature often showed value stocks beating growth stocks. What does this mean?
- As many stocks go through value and growth designations as their market price fluctuates, this implies that stocks become priced too high or low because of unfounded optimism or pessimism and eventually will return to true economic value.
- It definitely does not mean that industries normally designated as growth industries will underperform those designated as value industries.
There is no question that investors always should be concerned with valuation, no matter which stocks they buy.