Some Growth Stocks Still a Good Buy
With apologies both to Bart Simpson and to his many detractors, the ‘toon kid could probably summarize the stock market’s current state pretty well: “Don’t have a cow, man--the good stocks aren’t all gone!”
If you think it’s too late to get in on the market rally, you’re probably making two mistakes: First, thinking it’s too late; and second, being panicked over timing, period.
True, many good stocks have jumped sharply this year, as investors have once again focused on the basics--that is, they’ve flocked to stocks of “growth” companies that are capable of posting 15% annual earnings gains or better.
But let’s say you zero in on a stock such as Boeing, and you fear that it’s overpriced now at $77.125, or 14 times estimated 1990 earnings per share. In March, a lot of investors worried that Boeing was rich at $67.375, or 12 times earnings.
Who knows whether, a year from now, Boeing will be selling for 16 times estimated 1991 earnings. The point is, Boeing’s earnings growth looks very healthy for another two to three years. That’s a lot of insurance for an investor, and that’s what the market is paying for these days.
If you hunt for growth stocks now, you’re going to pay more than you would have paid in March, by and large. If you keep waiting for prices to go lower, however, you may be disappointed. And even if stocks take a hit soon, how will you know when we’re at the bottom?
Growth stock investors take a long-term view and they put their faith in a market axiom that is almost never wrong: If the company’s earnings keep rising, so will the stock price. That’s why the Dow Jones industrial index has risen from 41.32 in 1932 to 2,831.71 now.
Bill D’Alonzo, who runs the very successful Brandywine stock mutual fund (assets: $220 million) in Wilmington, Del., says simply: “We’re not market timers. We don’t want to be sitting here every day agonizing over the market’s short-term moves.”
His fund is up 21% over the past 12 months on the strength of his stock picking. When D’Alonzo looks at the market today, he still sees stocks that are reasonably priced for a two-year time horizon.
Here, some ideas from D’Alonzo and two other money managers:
* D’Alonzo has had a big winner in ShowBiz/Pizza Time, the Irving, Tex.-based restaurant chain that succeeded the first (and now defunct) Chuck E. Cheese restaurants. New management has engineered a turnaround by shifting the focus to a younger crowd (kids aged 2 to 12), he said. At 13 times estimated 1990 earnings per share of $1.90 (including tax benefits), the stock still looks attractive to D’Alonzo.
He also cites SynOptics Communications. The Mountain View, Calif., firm designs computer networking systems for companies--a fast-growing market. SynOptics sells for 20 times estimated 1990 earnings per share of $1.95. But based on estimated 1991 earnings of $2.65, the stock’s price-to-earnings multiple is 15. That’s very reasonable for a growth stock, D’Alonzo says.
* Gordon Fines, senior portfolio manager at IDS in Minneapolis, oversees some of the stock fund industry’s stars, including the IDS Growth fund. Fines looks at a red-hot stock such as Compaq Computer and still sees a bargain at 12 times estimated 1990 earnings. At $118.75 a share, he says, “that’s just no big deal for a company growing at Compaq’s rate.” He feels the same about casino firm Circus Circus and tobacco/food giant Philip Morris.
* Prudential-Bache Securities this month pulled together a list of 23 solid growth stocks that it believes could lead the pack in the early 1990s. Included are retailer Melville Corp. (Marshall’s, Thom McAn shoe stores and CVS drug stores, among others); Newell Co., a very profitable maker of appliances and products for the kitchen and bath, and Chips & Technologies, a computer chip company that Pru-Bache says “leads the industry in innovation.”
REVISITING SOME MARCH PICKS . . .
Here’s a list of growth stocks that appeared in this column in March--as recommended by several analysts--and how the stocks have fared.
March 15 Thurs. Pct. 1990 Stock close close change P-E* Staples $19 3/4 $24 1/2 +24% 22 Shoney’s 12 5/8 15 +19% 20 Boeing 67 3/8 77 1/8 +15% 14 Hancock Fabrics 32 5/8 37 5/8 +15% 15 Occup. Urgent Care 18 3/4 20 3/4 +11% 33 Carnival Cruise 20 1/2 22 3/8 +9% 13 First Brands 19 3/4 19 5/8 -1% 8 Oracle Systems 26 1/8 18 1/4 -30% 14 S&P; 500 338 354 +5% 15
. . . AND SOME NEW IDEAS
Some growth stock names that money managers say still are good values.
March 15 Thurs. Pct. 1990 Stock close close change P-E* ShowBiz/Pizza $16 1/4 $24 1/2 +51% 13 Compaq 96 7/8 118 3/4 +23% 12 Circus Circus 50 1/2 60 1/8 +19% 19 SynOptics 33 1/2 39 1/2 +18% 20 Philip Morris 38 44 3/8 +17% 12 Newell Co. 26 1/4 28 1/2 +9% 18 Melville 48 48 7/8 +2% 12 Chips & Technology 21 3/8 20 5/8 -4% 9
* Stock price-to-earnings ratio based on estimated 1990 earnings per share
Sources: Earnings estimates from Dean Witter, Hambrecht & Quist, Prudential-Bache and T. Rowe Price
