T.ROWE PRICE: Mr. Growth Stock
died in 1983, gave his name to an entire theory of investment. " a real ben graham situation,". Price's growth-oritented thinking gradually push aside the "value" style.
seeking "fertile fields for growth" and then holding these stocks for long periods of time. he defined a growth company as one which shows"long term growth of earnings, reaching a new high level per share at the peak of each succeeding major business cycle and which gives indications of reaching new high earnings at the peak of future business cycles." cocacola was one exactly such as company. as were Merck, Wal-Mart, and Texas Instruments.
Since industries and corporations both have life cycles, the most profitable and least risky time to own a share is during the early stage of growth.
In his eighties, Price still got up at 5 AM. He was exceedingly desciplined and organized, with an agenda for each day, always executing the items in the order listed and never taking up unlisted ones. Similarly, when he bought a stock at 20, he also established that he would sell some at, say, 40 and did even if things had changed for the good. if he had determined to buy more stock at 13, he would even if the news from the company was discouraging.
Black & Decker, held for 35 years, risen from 1.25 to 108. Honeywell, 34 years, from 3.75 to 138. 3M - 33 years, from 0.5 to 85.5. Square D - 33 years 0.75 to 36.7 Merck, 32 yrs, from 3/8 to 89.
one of the merits he claimed for his approach was that a nonprofessional could carry it out successfully. searching out the exceptional company with a view to holding it for long periods of time should work out better for an experienced and able but not phenomenally well-equipped investor than would a buy-and-sell approach. He wouldn't have to know as many different things or make as many difficult decisions. "even the amateur investor who lacks training and time to devote to managing his investments can be reasonably successful by selecting the best-managed companies in fertile fields for growth, buying their shares and retaining them until it becomes obvious that they no longer meet the definition of a growth stock". said Price.
Criteria:
1. superior research to develop rpoducts and markets
2. lack of cutthroat competition
3. comparative immunity from government regulation
4. low total labor costs, but well-paid employee
5. at least a 10% return on invested capital, sustained high profit margins, and a superior growth of earnings per share
fertile stock - identifying an industry that is still enjoying its growth phase, and settling on the most promising company within that industry. two best indicators of a growth industry are unit volume of sales (not dollar volume) and net earnings. often the way to play such growth areas (IT) is not thr service providers, but by owning companies - like Cisco, intel, and microsoft - make things that the service companies must in turn buy: not panning for gold, but selling the pans. when an industry finally begins to mature and then go downhill it may do so on "leverage": carrying profits down even faster than unit volume. railroad as a maturing industry bzc railroad ton-miles had started to decline in the face of improving business, and continued to do so. since fixed charge didn't decline equally, profits fell drastically.
how do you find the best companies within an attractive industry? they must have demonstrated their superior qualities, either by showing improving unit growth and profits right thr the down phase of a business cycle ("stable growth") or by showing higher earnings from peak to peak and bottom to bottom thr several cycles ("Cyclical growth"). some of qualities that contribute to that are:
1. superior management
2. outstanding research
3. Patents
4. Strong finances
5. A favorable location (where applicable).
one if these factors should persist can one decide that a company is probably a growth stock. when growth turns to decadence, it can be usually be attributed to erosion of former advantages, for instance:
1. management may change for the worse 2. market may become saturated. 3. patents may expire or new inventions render them less valuable 4. competition may intensify 5. the legislative and legal environment may deteriorate 6. labor and raw materials costs may rise.
Price did not believe in specific predictions of a company's future. "No one can see ahead 3 years, let alone five or ten years", the valuation models - which project future earnings year by year, apply a discount factor, and give a theoretical price today - are highly suspect. according to price - one should stay with the best companies in the highest-growth industries as long as their progress continues. Do not try for a pinpointed math approach that creates a illusory certainty out of an unknownable future. Janpan offered wonderful investment - some of the greatest companies, even though they were becoming larger and stronger all the time only at 3 or 4 PE.
Buying points - Price proposed a specific plan for buying any stock, which one should write out and then adhere to. It has two parts: fixing a price, and then buying (and selling) on a scale. A - valuation. Price emphasized the price-earnings multiple appraoch to equity valuation, rather than the appraising of hard assets.
1. a record of earnings growth. But one shouldn't project the rapid increases of the dynamic phase of a growth stock too many years into the future.
2. The best time to buy is when growth stocks, especially those one is interested in, are out of fashion.
3. "bule chips" with a record of rising dividends are worth a higher multiple than secondary stocks without dievident growth.
4. stable growth stocks are worth more than cyclical stocks subject to the vagaries of the business cycles, and of course cyclicals are worth a higher multiple of their recession earnings than of their boom earnings.
5. one should pay a lower multiple of earnings for growth stocks when bonds are available at high yields.
6. when the stock prices is low enough so that they are yielding 5% or more, one should pay lower PE for growth stocks than when stocks in general are high enough to bring yields down to , say ,2 or 3 percent or less.
In practice, Price seemed to fix the appropriate pe ratio for a desirable growth stock by noting the high and low pe of the last few market cycles and establishing a target pe at sth like 1/3 over the lowest pe the stock touch d during the period.
Selling -
1. beware of decline in the return on invested capital. that's often a warning of the onset of a company's maturity.
2. business recessions create a consusing background against which to study the performance of a particular company. Its earnings may decline bcz thr its growth is still intact it is being dragged down by general conditions, or on the contrary its growth may really have peaked, which one may overlook in the general business decline.
3. some industries, such as real estate and fire and casualty insurance, have their own cycles that are separate from the business cycle, consufing things further.
New ERA appraoch - buying assets that should be inflation-resistant: real estate, natural resources, gold and silver.
