Insights: Finance—Seduced by Growth Stocks
Although the market is more challenging, wisely chosen growth stocks are still a good investment
Mario J. Gabelli
From the Print Edition:
Kevin Costner, Nov/Dec 00
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While a company's competitive advantages are central to establishing its growth stock credentials, so too is how the company is positioned relative to major socioeconomic trends. If the world is changing to your benefit, you may enjoy the experience of swimming downstream. It clearly beats swimming upstream, as any salmon will tell you. The aging of the population, the information revolution and economic globalization are three trends that influence our investment decisions. Companies in the crosshairs of these trends have little to fear. The aging of the baby boom generation in America, Japan and Europe has implications for how we spend our time and money. We need more health-care and financial services. The lack of growth in the labor pool results in more substitution of capital for labor as we are forced to improve productivity. This usually means we spend more on technology.
The days when growth stock investors could ignore those volatile technology stocks are over. In case you haven't noticed, most of the new jobs created in this country recently are in the information technology sphere of the economy. Technological advances in hardware, software and telecommunications are changing the way we work, play and communicate. The Internet is the information highway. It is an agent of change. The companies building the new technologies are at the center of this new economy. Companies that are leading this revolution are experiencing turbocharged growth. These are Cisco Systems, Sun Microsystems and EMC, among others. Companies that are using new technology to improve the productivity of their businesses gain, too. These include drug companies like Pfizer and Merck, financial service companies like State Street Boston and Charles Schwab, media companies like Time-Warner and Viacom, and communication companies like Qwest and Vodafone.
Thanks to modern communications and management tools, and a world economy based more and more on capitalism, we have an increasingly global economy. About 95 percent of the people on this planet do not live in the United States. Many new markets have opened for multinational companies to exploit. Globally, we see strong demand for American and European technology, pharmaceuticals, airplanes, movies, fast foods, consumer brands and a wide range of capital goods.
Sure, companies that do business throughout the world will encounter bumps in the road from time to time, but the long-term payoff should compensate for the headaches. To be sure, American or European products are not in demand absolutely everywhere, and establishing a presence in some locales is costly in the short run. However, the markets are vast and represent major opportunities for the companies that master the complexities and stick it out. Ask IBM, Intel or Microsoft what their earnings would be if they only did business in the United States. Ask the drug companies. Ask Time-Warner how much profit it makes from the overseas distribution of films and music. Big companies want and need big playing fields.
CAN'T LIVE WITHOUT THEM
We don't know how long America's love affair with blue-chip growth stocks will last. The past five years were richly rewarding, but are 20 to 30 percent annual returns really sustainable? It won't be easy and may not be likely. Additionally, there are times when the best stock price gains are generated by "value," foreign or small-company stocks. Stock market history suggests there is a cycle to returns by investment style. Diversifying by style makes sense as a means to control risk. That said, if the economic background for stocks remains favorable and the earnings of many of these companies continue to grow at 20 to 30 percent rates, then investors in these stocks are likely to reap additional rewards. Common sense seems to dictate that you should have some portion of your portfolio in these celebrity stocks. Ignore them at your peril. To own them is to love them.
Mario J. Gabelli is the founder and chairman of Gabelli Funds Inc., a Rye, New York-based financial services company. He appears regularly on CNN and CNBC.
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