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Growth at Any Price


It may be time to move upscale and start hanging out in the penthouse rather than the boiler room.

"Turn the beat around,
Turn it upside down..."
-Turn the Beat Around (Vickie Sue Robinson)

I think Vickie Sue Robinson said it best. Throw out your rule book and embrace a concept that will give you heart palpitations.

Don't let high multiple stocks scare you. Growth is starting to get scarce and investors will have to pay up for it. I know stocks like Research in Motion (RIMM), Apple (AAPL), and Wynn Resorts (WYNN) have multiples that would give most value investors nausea, but if I am correct stocks like these will out-perform supposedly cheaper stocks with slower growth rates. When a commodity becomes scarce its price goes up and that is what is happening to growth. I'm not talking about the kind of steady growth you see out of companies like Coke (KO) or Pepsi (PEP). I'm talking about uber-growth.

Investors by their nature are "growth junkies". They need a fix and need it badly. As the saying goes, it has been pretty dry recently.

Start focusing on the top line of companies, not just the bottom line. As the profit contagion spreads, knee jerk reactions will focus on companies trading at valuation troughs where there is a perceived sense of safety because the multiples are low. Sure, many of these companies won't decline significantly from current levels, but on the other hand they won't make you money either.

If all you want to do is protect yourself from a market decline then go to cash. Take a trip to the Caribbean and come back at the end of the year.

Research in Motion, Apple, Wynn Resorts and others are all growing significantly above the market and of course have multiples to match. Stocks like these are likely to continue their out-performance as long as this slowdown continues. I could go on and on bringing up very expensive stocks that are doing quite well.

A little history to back up my thesis. Remember Nvidia (NVDA) in 2001 with an 80 PE? Its growth rate was accelerating dramatically in a sea of chip stocks looking at declining revenues. Being cheap didn't make you money. Growth became scarce so you had to pay more for it.

Yes, you'd want to monitor these stocks aggressively and pull the rip cord at the first sign of a slowdown. Hey, I didn't say it would be easy. If it were easy, everyone would be doing it.

The stocks don't have to be cheap to fit the criteria but the one data point they must possess is an accelerating growth rate.

Let's look at another example. I know homebuilders were cheap in the bear market but if that was all they had going for them they would have stayed stuck in the mud. During that time homebuilders made significant moves not because they were cheap. They had always been cheap. The moves came because the growth rates started to accelerate dramatically.

I am fully aware that today is a Fed day and these stocks could move up or down a lot depending on what Uncle Ben does. Ignore this short term noise and embrace the concept. If the volatility in these names is too much for you then try a basket approach with three or four names in smaller amounts.

In the current market environment cheap stocks may stay in the discount bin for some time. It may be time to move upscale and start hanging out in the penthouse rather than the boiler room.
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No positions in stocks mentioned.
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