Comparison of Two Growth Stocks

Catalyst Stocks Premium Stock Pick Service

How to Become a Stock-Picking Pro

Get Instant Access

Some investors buy stocks while others sell because they anticipate the future in different ways. Some sell because when they look a few months ahead they see a possible recession coming. Others, looking farther ahead, buy because they believe that the price of the stock already discounts a possible recession. They are anticipating the business recovery, and the vast growth of revenues and earning power that they see in some companies.



Broken Wired Glass

The chart illustrates the turnaround that began in 1962 when new management assumed control of the company. The arrow points to the superperformance price phase. The earnings of the company have been sensitive to business cycles, resulting in volatile stock-price performance. Chart by Securities Research Company

I recall knowing of some specific companies with such obvious growth potential that at the time I wondered why other investors did not seem to view the stock with the same enthusiasm that I did. In 1953 I purchased the stock of an unlisted company that had a rapidly expanding chain of popular restaurants. It was a capably managed company and appeared to have vast potential for growth. Yet for a long time the stock remained relatively quiet. It appeared to me that hardly anyone else was interested in the company, or had even heard of it. That company was Hot Shoppes, Inc., now known as Marriott Corporation. Today it has a chain of hotels and owns about five hundred restaurants. Sometimes an investor just has to wait and wait for other investors to become aware of a good opportunity. It is a matter of being too far ahead of the crowd. There are times when an abundance of patience is required.

Growth potential can sometimes be a very elusive quality. Many companies that have been referred to in the financial press year after year as glamour stocks do not appear to have nearly as much growth as numerous unpublicized companies. Compare the performance of Polaroid in Chart 20 with that of Kresge (S.S.) in Chart 21. Polaroid has been the publicized company, the glamour stock. Polaroid Corporation's stock for many years was given a very high price/earnings multiple by investors. For at least a decade the stock had a P/E consistently over 30, frequently over 50, and sometimes as high as 90. Yet Polaroid's earnings trend has often been erratic, as is shown by the chart. From 1967 to 1975 there was virtually no increase in earnings. Polaroid holds hundreds of patents in the field of instant, one-step photography. In Polaroid's process, the materials required for developing and printing are part of the film. This permits the person taking photographs to obtain a completed print from the camera within seconds. It is this potential that has appealed to investors. Moreover, the company has continued growing even though net income has remained quite static. Revenues have increased consistently. It has been research and the cost of developing new photographic systems that have depressed earnings. At some point in the future the stock's growth potential is likely to be seen again, as it was between 1964 and 1968 when the price of the stock rose more than 600 percent in a strong superperformance phase.

Kresge, on the other hand, has not been as highly publicized and has less frequently been referred to as a glamour stock. All it has done is to grow steadily year after year in the relatively unglamourous and highly competitive field of variety store merchandising. Kresge's net income has increased each year since 1962; gross revenues have increased steadily for an even longer period. The company's K-Mart chain has become the largest discount chain in the country.

In 1963, when Kresge stock began its first superperformance price phase, the company had only 5,518,000 shares of stock. The P/E ratio was about 14. So an ideal combination was present; a reasonably priced stock in a small company that had vast growth potential and increasing earning power.

Anticipate Growth

With some companies it is possible to anticipate strong growth in revenues and earnings for many years in the future. The gross revenues of IBM, for example, were $410,000,000 in 1953, $2,863,000,000 in 1963, and $12,675,000,000 in 1974. Xerox had gross revenues of $268,000,000 in 1964 and $3,576,400,000 in 1974. In the early 1950s it was therefore possible to see that vast growth ahead for IBM, just as it was possible to see the growth potential of Xerox in the early 1960s. Many investors did see the vast potential of these companies and acted. Vast growth potential is one of the reasons these companies have been popular, which has resulted in their having high P/E ratios.



For many years investors have seen vast growth potential in Polaroid's new photographic processes, and the stock has had a high P/E ratio. However, since 1968 the earnings trend has been generally flat. A superperformance phase began in 1964.

Chart by Securities Research Company

This stock of the leading discount retailer has experienced three superperformance price phases. The first phase began in 1963 and lasted until 1966; the stock approximately quadrupled in price. The second phase began in early 1967 and ended in late 1969; the price again quadrupled. The third phase, during which the price quadrupled again, began near the 1970 bear market bottom and lasted until January 1973. Except for one quarter in 1969 ;the earnings have consistently increased from quarter to quarter. The stock's price has increased even faster than earnings, and there has been a large expansion in the P/E ratio, as can be seen on the chart by the increasing separation of the vertical price range bars from the earnings lines. Chart by Securities Research Company

Even if it is necessary to wait a number of years for a stock to be recognized, eventually such patience can prove to be very rewarding. Your only real alternative is to find another stock that will have superperformance price action sooner.

Was this article helpful?

0 0
Stocks and Shares Retirement Rescue

Stocks and Shares Retirement Rescue

Get All The Support And Guidance You Need To Be A Success At Investing In Stocks And Shares. This Book Is One Of The Most Valuable Resources In The World When It Comes To

Get My Free Ebook

Post a comment