When investors think of "growth" stocks, some classic American names usually come to mind: Coca-Cola Co., Wal-Mart Stores Inc., McDonald's Corp., Procter & Gamble Co.
But many of those classics have taken a back seat in the bull market's advance over the last three years. That could spell opportunity for investors who still believe these mega-companies have strong long-term prospects, despite the head winds many of them face.
David Kathman, an analyst at investment research firm Morningstar Inc. in Chicago, recently looked at the 2013 and 2014 performance records of mutual funds that own big-name stocks.
"Left behind the past few years have been many funds focusing on 'quality' stocks, generally defined as those that are highly profitable, generate a lot of cash and have strong balance sheets," Kathman said.
The Vanguard Dividend Growth Fund, for example, is up 5.7% year to date, trailing the 8.1% advance of the Standard & Poor's 500 index, including dividends. The Vanguard fund's 25 largest holdings include Wal-Mart, P&G and McDonald's.
In the three years that ended Sept. 30, Wal-Mart was up a total of 59%, P&G gained 46% and McDonald's returned a mere 19%. All three lagged far behind the S&P 500, which gained 86% in the period.
Many of the giants are facing tough challenges.
Wal-Mart is dependent on millions of families at the bottom of the income rung, and so has been pinched by its customers' financial struggles. P&G has seen many of its consumer product brands lose market share to new competitors. McDonald's has been hit by a consumer backlash against fast food in general. And this year, the strong dollar means U.S. multinational companies' foreign earnings may take a hit.
At the same time, Wall Street has been drawn to industries that have brighter profit growth prospects in the near term, including technology, heavy industry and healthcare.
Still, some analysts warn against underestimating the ability of the old-line growth stocks to produce healthy returns for shareholders in the long run. All of the companies continue to have enormous clout in their markets, and their businesses generate huge amounts of cash. All pay above average dividends to shareholders.
And they aren't sitting still. P&G, for example, in August said it could sell about half of its global brands in the next two years to concentrate on 70 to 80 faster-growing core brands.
In the near term, many of the classic growth stocks don't look like screaming bargains. Based on analysts' consensus estimates of 2014 earnings per share, the price-to-earnings ratio of Coke shares is 21. For McDonald's it's 18, and for Wal-Mart it's 15. The figure for the S&P 500 overall is about 17.
But if the bull market wanes, these stocks are likely to attract investors who want both growth and relative safety.
"History shows that high-quality investments tend to win out in the end, though it's hard to predict exactly when the tide will turn," Kathman said.