Is growth back? It sure seems so. Analysts expect tech stocks' earnings to easily outpace the market average during 2007. Given recent results from Cisco Systems, eBay (Nasdaq: EBAY ) , and Sun Microsystems (Nasdaq: SUNW ) , I'm inclined to agree.
Now, a survey of leading investment managers conducted by the Russell Investment Group says the growth rally will continue through the remainder of the year. And relatively new Fidelity Magellan manager Harry Lange says growth isn't just good, it's cheap. "I am still convinced that this is the place to be, and if anything ... I have been adding even more to growth stocks," Lange told Reuters recently.
Don't dump the downtrodden
Surely Lange's optimism draws from years of success with growth stocks as the manager of Fidelity Capital Appreciation, which thumped the market during both the go-go years of the bubble and the ugly aftermath that ensued. But there's also more to it than that. History, for one.
Growth stocks did better than value for the six years between 1994 and 2000, as technology stocks soared. Value stocks have been on a roll since. Now, as earnings growth begins to show signs of slowing, fast movers unaffected by general economic malaise could return to prominence. That's why, when Lange took the helm of the Magellan fund, he dumped Pfizer and bought Apple (Nasdaq: AAPL ) .
What's more, growth funds have lagged value funds for far too long. Consider small growth go-getter T. Rowe Price New Horizons, which has returned an average 12.7% over the past five years. Great though that is, it doesn't quite stack up to small value superstar Royce Special Equity, which has returned 13.4% annually over the same period.
Now, New Horizons manager John Laporte is betting on speedsters such as dialysis device maker DaVita (NYSE: DVA ) and machinist FMC Technologies (NYSE: FTI ) to return his go-go style to the podium. (Both firms are expected by Street analysts to expand earnings by more than 20% annually over the next five years.)
Be a rebel with a cause
Here at Fool HQ, we've begun to see the turn as well. Over the summer, David Gardner's Motley Fool Rule Breakers portfolio was bleeding red. And the quest for the next Starbucks was stuck in the mud. No longer. Today, the portfolio is once again beating the market (by 7 percentage points) and features three stocks that have quadrupled.
How did it turn around? My analysis points to three traits shared by our biggest winners:
- A competitive advantage in an important, emerging market.
- A sustainable business growing at an above-average pace.
- Top-flight managers that have a clear vision for what they wish to accomplish.
As you seek the sort of multibagger returns that helped growth gurus like Peter Lynch and Philip Fisher make millions from thousands, remember these factors. And, in the meantime, if you're looking for ideas for how to take advantage of the current growth stock rally, click here to get 30 days of free access to Rule Breakers. We'll show you everything we're buying now.
This article was originally published on Nov. 14, 2006. It has been updated.
Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this story at the time of publication. Starbucks and eBay are Stock Advisor picks. Pfizer is an Inside Value recommendation. Fidelity Capital Appreciation, T. Rowe Price New Horizons, and Royce Special Equity are Champion Funds selections. The Motley Fool's disclosure policy is a rebel with a cause.