VISTA, Calif. – There are three schools of equities investment on the buy side: growth, value and blend. Most investment style is a blend of growth and value, plus various sectors that have historically behaved counter-cyclically to the overall stock market.
With growth style, investors look for companies whose business is on the cutting edge, reflecting a paradigm shift such as high technology or bio-technology, or companies whose products and services are sold in markets that are experiencing high growth demographically.
Twenty years ago, the common use of personal computers by the general public represented a paradigm shift. Companies producing PC hardware and software were on the cutting edge. As computer electronics grew smaller and more affordable, businesses and individuals adapted quickly. Microsoft Corp. was a growth opportunity in that era. A dollar invested in Microsoft in 1986 would be worth approximately $20 today.
Growth is measured by increase in revenue and profits from one period to the next. A growth company would have a higher rate of growth than the average in its industry.
Microsoft is in the application software business, along with Oracle Corp., SAP, Adobe Systems Inc., Computer Associates and Intuit. According to statistics reported in Yahoo Finance, its market capitalization was over $229 billion as of June 6, with a quarterly growth rate of 13.3 percent in 2006 over 2005. However, comparing this performance against the average growth rate of 17.5 percent among the six largest companies, Microsoft was a lagger.
Sometime growth occurs due to favorable business climate. The success of Indian gaming is one such growth phenomenon. Harrah’s Entertainment actively sought partnership with tribes. International Gaming Technology manufactures Class II gaming machines that meet National Indian Gaming Commission standards. Investment in these publicly traded companies provided handsome returns.
Value style of investing is about finding hidden treasures. Investors looking for value usually analyze the potential value of a company. The absolute requirement is that the assets, products and services of the company must be demanded in modern day. For example, one would not invest in telegram services nowadays because of global fax and e-mail technologies.
Once the feasibility requirement is met, look for other potential factors. Is the market value trading at a discount relative to peers in the industry? Is the market price low relative to net asset value? Is the price also low relative to earnings and cash flow? Are there hidden assets such as tax losses carried forward, overfunded pension accounts and appreciated real estate? Is there a new management approach toward growth?
Some may consider Motorola Inc. as a candidate for value investing. First of all, it is in the communications technology equipment business, with other companies such as Nokia, Lucent Technologies, Ericsson, Alcatel and Qualcomm Inc. The average market price to earning ratio among these companies is 22.35 times annual earning. However, Motorola’s market price is only 12.03 times its earnings. This makes Motorola a value candidate for further evaluation.
Patent infringement verdicts can potentially shut down the operations of a company. Research in Motion Ltd., which offers the BlackBerry handheld wireless communications device, was sued by NTP for patent infringement. BlackBerry is a broadly used communications platform, not just by techies but also by many federal government management personnel.
On March 21, 2005, when news of the Research in Motion/NTP settlement was announced, the stock price of Research in Motion rose by nearly one-third, from $62 to $81.
Most businesses fluctuate through cycles of growth and slowdowns along with the overall economy. A few industries do not. For example, when the terrorist attacks of Sept. 11, 2001, happened, the airline industry sank and tourism to Las Vegas nearly stopped. However, business in local Indian casinos flourished because people looked for entertainment in their local areas. Business for defense contractors thrived because of increased spending for national security.
There are other industries that usually perform independently of the overall business cycle. Regardless of the state of the economy, consumers spend money for health care, energy, financial services, real estate and leisure, as these constitute basic services of daily living.
While these pure styles are defined, most investors take a blended approach, mixing growth and value together, and add an international component. In order to create a diversified portfolio, practice due diligence and invest in at least 10 companies. Otherwise, look for mutual funds whose investment objectives, fees and returns match one’s investment style.