Stock Market Investing - 6 Types of Companies In Stock Market

Speculative-Growth Stocks - Is Sales Growth Outpacing Asset Growth?

The speculative-growth market is full of companies that are doubling their sales by doubling their assets.

This is a legitimate way to expand.  Investors pour additional capital into the business, which drums up new sales.

Eventually (we hope), the company reaches a critical mass at which it becomes a big moneymaker.

But to limit risk, we can focus on companies that are making more efficient use of their assets as they expand, generating rising sales on each $1 of capital.

Yahoo has done pretty well on this front.

• Between 1997 and 1998, its sales grew 18%, but its assets grew even faster, at 333%.  
• In 1999, though, Yahoo's sales started to grow faster than its assets, indicating that it's starting to squeeze more growth out of its assets.  
• That tells us that Yahoo is growing quickly, but prudently.

Speculative-Growth Stocks - Introduction

Speculative-growth stocks can inspire dreams of wealth - and nightmares of poverty.

These companies are often new ventures selling something people want, generating rapid revenue growth, but incurring high expenses as they strive to become a permanent fixture of the corporate landscape.

One might be the next Microsoft MSFT.  Or the next Atari.

Their defining characteristics are rapid revenue growth but slower or spotty earnings growth - strong sales, in other words, but a lagging bottom line.

In fact, many speculative growth companies lose money - lots of it.  That's not much inducement to invest.

Still, corporate America's future heavyweights and best investments may lurk in this high-risk, high-reward corner of the market.

It's possible to curb some of the risk, too.

For example, Yahoo YHOO, the World Wide Web portal was one of the hottest Internet stocks of the 1990s.

So which Stock Type do you wish to add to your portfolio?

To highlight fundamental differences between companies, examine each company's historical record, growth rates, cash flows and other financial data.

Based on these fundamental differences, assign it to one of eight groups.  These stock types are:

1. Speculative Growth
2. Aggressive Growth
3. Classic Growth
4. Slow Growth
5. High Yield
6. Cyclicals
7. Hard Assets
8. Distressed.

These stock types address the question:   What kind of company is this?









Here is a quick overview of these very different companies.


Speculative Growth:  Yahoo YHOO.  The premier Internet portal has become one of the giants of the online world in 1999, with an audience in the tens of millions.  It has become consistently profitable, unlike most of its online brethren, but its track record is still so short that it is definitely risky.


Aggressive Growth:  Starbucks SBUX.   The coffee chain has grown like gangbusters while also showing a healthy profit, the two most important characteristics of an aggressive growth stock.


Classic Growth:  McDonalds MCD.  the fast-food giant is a stereotypical classic growth stock:  A well-known name with an established track record.  It's growing steadily, but not as fast as speculative growth or aggressive growth companies. 


Slow Growth:  Procter & Gamble PG.  The consumer-products giant is a good example of this type; its growth is slower than that of even classic-growth companies, but it makes up for this lack of growth with high profitability.


High Yield:  Philip Morris MO.  The food and tobacco giant's stock was hammered in 1999, but the company still gives back much of its enormous cash flow to shareholders in the form of a hefty dividend.  


Cyclicals:  United Technologies UTX.  This industrial conglomerate is a great example of a cyclical stock.  Its business - aerospace equipment, air conditioners, and elevators - are highly sensitive to the performance of the general economy.


Hard Assets:  Barrick Gold ABX.  This company is one of the most consistently profitable gold-mining stocks, but it also illustrates many of the charcteristics unique to companies that sell hard assets such as minerals or oil.


Distressed:  Silicon Graphics SGI.  This maker of computer workstations and server systems was once a hot technology stock, but it has suffered through a lot of problems since the mid-1990s and has seen its stock price tank.

Using stock types, help you pinpoint where a company is in the corporate life cycle.

Savvy investors know about the corporate life cycle:

• Companies in their startup phase lose money.
• If they're successful, though, they enter a rapid growth period, where sales - and eventually profits - shoot upward. 
• Then, alas, comes the point when the company has exhausted all of the easy growth opportunities.  The low-hanging fruit has been picked.  The company enters a mature phase in which sales maybe growing, but at a much slower rate than before.
• Finally, in a company's dotage, it's all management can do to grow the company at all.  The company's either in stagnation or outright decline.  

Using stock types, help you pinpoint where a company is in the life cycle.




Let's look at semiconductors.
What is the key difference between chipmakers Intel INTC and National Semiconductor NSM?
Or between Broadcom BRCM and Rambus RMBS?


One of the babies of the industry is Rambus, a company that makes devices to speed up computer processing.  The company's sales have grown rapidly, though inconsistently.  Earnings have been spottier.  Rambus has actually lost money over the past 5 years in aggregate.  It is a great example of a speculative - growth company.

Moving up the maturity scale a notch, we find Broadcom, a company about 10 times the size of tiny Rambus.  The company specializes in chips that enable broadband data communication.  Broadcom's sales have grown  rapidly, and although it has had one money-losing year over the past five years ending in 1999, it's generally increased its earnings in line with sales.  That's the sign of an aggressive-growth company:  one that has managed to increase both sales and profits at a rapid clip.

Now we come to companies like industry leader Intel.  Not too long ago, Intel landed in the aggressive-growth group along with firms like Broadcom, but because of slowing growth, Intel has mellowed into a classic-growth company.  Despite the snags of late, Intel has a record of good sales growth and consistently positive earnings.  That's the mark of a classic-growth firm.  Don't expect them to grow sales by double digits every year, but do expect them to generate solid profits - and maybe even pay out a good dividend.  

Even more mature than Intel is Texas Instruments TXN.  The company was busy restructuring itself in the late 1990s and has been shrinking as a result.  The company's trailing three-year sales growth at the end of 1999 was negative, and earnings have bounced all over the place.  Texas Instruments merits a slow-growth tag because of its rather unspectacular record.

The trials at Texas Instruments, however, are nothing like those at chipmaker National Semiconductor.  The company's sales and cash flows have fallen, and the firm has lost money as a result.  The situation is bad enough to land National Semiconductor in the distressed stock type - the nether-zone in which we place firms with a history of serious operating problems.  These are typically companies that have run into growth problems, either because the market is saturated or because competitors have the upper hand.

Stock Types

Microsoft MSFT and Microtest MTST.  They are both technology companies.  Both have "micro" in their names. But that's where the similarities end.

Microsoft is the most successful company of the 1990s with a market value of $450 billion at the end of 1999.

Microtest is a struggling produce of hand-held scanners, is worth a piddling $30 million.

These are two technology companies, two very different stocks.

Inside any sector - whether it is technology or utilities - you will find companies as different as Microsoft and Microtest.

To highlight fundamental differences between companies, examine each company's historical record, growth rates, cash flows and other financial data.

Based on these fundamental differences, assign it to one of eight groups.  These stock types are:

1. Speculative Growth
2. Aggressive Growth
3. Classic Growth
4. Slow Growth
5. High Yield
6. Cyclicals
7. Hard Assets
8. Distressed.

These stock types address the question:   What kind of company is this?

What about Microsoft and Microtest?

• Bill Gates' company lands in our aggressive-growth stock type, the home of the fastest-growing companies.
• Microtest doesn't fare so well.  Because of declining cash flows and negative earnings, it is in the distressed group.  Hawking handheld cable scanners hasn't generated much growth.