Midsize Stocks - A Good Choice for Anyone's Nest Egg

It isn’t easy to find a stock that has the magic — an enticing financial elixir that combines stability with the promise of a decent rate of growth.

• Large-company stocks are relatively stable but move too slowly for many investors. 
• Small-company stocks’ value can rise quickly but could be seen as a gamble at a time in which investors aren’t exactly excited by the notion of taking on added risk. 

Say the experts: Find the middle. “The $2 billion to $7 billion market-cap range is really a sweet spot in the market,” says Don Easley, portfolio manager of the T. Rowe Price Diversified Mid-Cap Growth Fund.

“There are a lot of interesting companies in that area and there’s certainly a place for mid-caps in anyone’s portfolio.”

Stocks at these midsized companies aren’t called the“sweet spot”without reason. Indeed, the class of stocks that not too many years ago were classless — lumped in with large-cap stocks — has outperformed their larger and smaller peers. 

BetterInvesting uses annual revenue to determine a company’s category.

• For instance, midsized companies have annual revenues between $500 million and $5 billion. 
• Small companies have revenue below $500 million and 
• large-company revenue weighs in at more than $5 billion.

http://www.betterinvesting.org/NR/rdonlyres/9D3D3176-4E81-4D5D-90F7-19879D031A6A/0/cs.pdf

Screening for Mid-Size Companies

The companies screened should satisfy the following conditions:

1.  Past performances

• trailing-12-month revenues of between $500 million and $5 billion;
• five-year sales and earnings growth of at least 12 percent.

2.  Projected future performances

• forecasted five-year annual earnings and sales growth of 12 percent; and 
• a projected annual total return for the next three to five years of at least 12 percent. 

Also, look for Financial Strength and Earnings Predictability. 

As with any stock screen,this is just a starting point for research; no investment recommendations are intended.

Also, make sure any company of interest looks suitable on a Stock Selection Guide using your own judgments.

Discerning Growth from Value

Growth versus Value Stocks

Growth companies are those that are growing sales and earnings every year. Their stock prices are rsing, their profit margins are big, and their expectations are high.

Value companies are trading at low prices (relative to their intrinsic values). The low prices are usually the result of tough times at the company but occasionally just because the market is a weird place. Preferably, you buy a value stock just when it has fixed its troubles and begins to profit again, or just before the market discovers its discount price.

Often the best growth investments are smaller companies. Of particular importance in evaluating growth companies are high earnings record, high relative strength and low price-to-sales ratios. O'Shaughnessy found price-to-sales a great measure to mix with traditional growth yardsticks because it keeps growth investors from getting too carried away with emotion and paying too much for a stock.

The best value plays are usually large companies. Not always, but most of the time. Large companies don't change much and that makes them prime candidates for bargain pricing. They are not going anywhere, after all, so they have no choice but to recover from whatever trouble they're in. For such companies, traditional value measures will be your focus. Those are dividend yield, P/E, price-to-book, and price-to-sales.

Growth or value investing in these times?

Growth or value investing in these times?
Written by Celine Tan
Tuesday, 02 June 2009 18:00

In the investment world, there are two broad investment styles -- value and growth investing. With stock prices around the globe experiencing major corrections in the past 18 months, should you be applying the value investing strategy?

Value investors seek stocks that they believe has been undervalued by the market. Some undervalued investments, which suffered acute fall in prices, are the result of overreaction to negative developments and this does not correspond with the investments’ long-term fundamentals, says Sharifatul Hanizah Said Ali, managing director of RHB Investment Management Sdn Bhd. “In such a scenario, value investors are likely to profit when the value of the assets, in which they invested at deflated prices, recovers.”

However, in the event that the investment suffers a drastic change in fundamentals -- from bad to worse, it will remain cheap for a long time. “Therefore, it’s crucial for one to be aware of the nature of your investment. This is even more so when it comes to value investing as some of these investments are under-researched and information may not be easily accessible,” says Sharifatul. Another common risk in value securities is liquidity risk, she adds.

Meanwhile, growth investors invest in companies that have a high-growth story, even if the price appears expensive. “While most growth investments yield decent returns [usually in line with the broad market], value investments can potentially yield exponential returns in the right market cycle [like small-cap stocks rally],” says Sharifatul.

You need to make a judgment call in determining the approach to your investment. “If you are of the opinion that the market recovery will be protracted and eventually spill over to the entire market, then it may be worth investing in value investments. Otherwise, it’s more advisable to invest in growth investments as they should move ahead of value investment,” says Sharifatul. “In essence, we prefer equity growth investments that are undervalued. We are also of the view that values are emerging among blue chips and fundamentally strong companies with good track records, prudent management and strong brand names. These established corporates would be the driver of growth and lead the economic recovery.”

Regardless of your approach, in deciding the intrinsic value of an investment, you are making certain assumptions, for instance, the expected revenue and earnings, says Chen Fan Fai, chief investment officer of Kenanga Asset Management Sdn Bhd. “If your assumptions are wrong, your valuation will be totally out – and this is where the risk lies.”

However, unit trust fund investors should not make the mistake of assuming that unit trust funds that have fallen in price appear to provide value. “In essence, a unit trust is a portfolio of assets. You cannot simplistically say that this unit trust fund, which has fallen from RM1 to 50 sen, is a good buy, compared with the one that has dropped from RM1 to 90 sen [both funds having the same investment mandates],” says Teoh Kok Lin, managing director of Singular Asset Management Sdn Bhd.

Alternatively, one can scrutinise the individual holdings of the stocks or bonds in the unit trust portfolio to gauge its value, says Sharifatul. “Assuming if the stocks are largely undervalued stocks and trade at steep discounts to their fair values, it is likely that the fund trades at a discount too or adopts a value investing strategy.”


http://www.theedgemalaysia.com/personal-finance/15495-growth-or-value-investing-in-these-times.html

Your Best Chance to Profit in 2009

Your Best Chance to Profit in 2009
By Richard Gibbons February 12, 2009 Comments (0)

If, after 2008, you're still looking at the stock market as a way to fund your retirement, most people probably consider you a few congressmen short of a bailout. (Zing!) It's probably progressed far beyond the point of people refusing to make eye contact with you. In all likelihood, your dog is, too.

Yes, it's tough proclaiming yourself a bull after a year in which every bull became a steer.
But there are a few perks. Like getting the profits that come from buying stocks at what could be some of the best prices you'll ever see.

A brief history of 2008
Last year was a fantastic demonstration of what happens when, in a highly leveraged world, everyone needs liquidity at the same time.

Anyone who borrowed to buy mortgage-backed securities needed cash as mortgage values plummeted. Investment banks like Bank of America (NYSE: BAC) prey Bear Stearns needed cash as the mortgage-backed securities on their books began to fall. Retail banks like Wells Fargo's (NYSE: WFC) Wachovia needed cash to maintain their capital ratios as defaults escalated. AIG needed cash to balance its losses in credit default swaps. Hedge funds needed cash to fund redemptions and reduce leverage as assets declined.

The problem is, when everyone needs cash, the only way to get it is to sell off assets. And that's what investors did, dumping almost every asset class with the exception of ultra-safe Treasuries. The stock market took it on the chin.

An overreaction
That's not to say that the market collapsed simply because everyone cashed out. The problems in our economy are real. We've seen huge bankruptcies, the unemployment rate has spiked beyond 7%, and consumer confidence is low. Companies that need cash are finding it tough raising money at reasonable costs.

But the carnage in the market isn't limited to the shaky companies that are likely to suffer the most. The S&P 500 contains the biggest, most successful, and most stable businesses in America. Yet more than 94% of the companies in the S&P 500 fell during 2008. Over 30% lost more than half their value! Certainly, deteriorating business prospects are responsible for some of that drop. But based on valuations, it seems likely that stock investors are selling because they must. Like everyone else, they need the cash.

And that's a really great thing if you're not one of Wall Street's forced sellers.

The sweet spot
Large-cap value stocks could be the best way to exploit this opportunity. I'm not just talking about slow-growing companies trading at low single-digit earnings multiples, but also compellingly cheap growth stocks.

For instance, these days, the universe of large-cap value stocks includes Apple (Nasdaq: AAPL). Apple has huge barriers to competition, $25 billion of cash on its balance sheet, an innovative culture, a 19% estimated annual growth rate going forward, and is trading for about 9 times free cash flow. At these prices, Apple is a large-cap value stock.

So why are large-cap value stocks a great investment these days?
Not because these stocks are certain to outperform the other categories under all circumstances, but because they present the ideal trade-off between risk and reward in these troubling times.

While there's a good chance that the economy will start showing signs of life sometime in 2009, there's a possibility that things will get even worse. When you're betting your retirement, you should own businesses that can survive the worst-case scenario.

Low risk, high reward
Generally, large-cap stocks fit that criterion. They have the most stable cash flows, the most well known brands, the greatest economies of scale, and the best chance of recovering from mistakes.

Would you put your money on Coca-Cola (NYSE: KO) to withstand a depression, or Jones Soda (Nasdaq: JSDA)? Would you bet on CVS (NYSE: CVS), or Rite-Aid (NYSE: RAD)? These two examples may be somewhat hyperbolic, but it's absolutely true that powerhouses like Coke and CVS are far more likely to survive than companies with smaller moats because they have the financial clout, the economies of scale, and the proven, winning business models.

In normal times, you'd really have to pay up for these sorts of dominant companies. But thanks to forced selling from investors struggling to raise cash, right now you can buy some excellent businesses extremely cheaply.

The S&P 500 is trading at just over 12 times 2009 earnings estimates, its lowest earnings multiple since the 1980s. What's more, due to the poor economy, the earnings of these powerhouse companies will be depressed in 2009, which means that the normalized earnings multiple is even more compelling. Large-cap stocks are extremely cheap, and I believe will offer superior returns over the next few years.

The Foolish bottom line
Of course, you still have to be careful -- as 2008 has shown us, you can't just throw a dart at the S&P 500 and expect to avoid a blow-up. You still need to pay attention to balance sheets and how much cash companies are bringing in during these troubling times.

But if you're alert, you can find the stocks right now that will pay for your retirement. So, now is a good time to start buying large-cap value stocks.

This article was originally published on January 8, 2009. It has been updated.

Fool contributor Richard Gibbons knows all too well the pain of becoming a steer. He doesn't own shares of any companies mentioned in this article. Apple is a Motley Fool Stock Advisor recommendation. Coca-Cola is an Inside Value pick. Bank of America is a former Income Investor choice. The Fool's disclosure policy wears a large cap to avoid sunburn.

http://www.fool.com/investing/value/2009/02/12/your-best-chance-to-profit-in-2009.aspx?source=iflfollnk0000001