A Leading Growth Investor Is Selling Tech. Should You?

Regardless of what you think of him, his newsletters, or his track record, Louis Navellier has in many ways become the face of growth investing. He's frequently on CNBC and other financial news shows talking tech and high-growth opportunities, usually with a bullish bent.

This, after all, is the man who wrote The Little Book That Makes You Rich, an overview of the eight numerical criteria Navellier uses to select outstanding growth stocks -- a formula that, according the book and the performance page for his company's newsletters, has helped him achieve a life of remarkable wealth.

Magic 8-Ball says, "Don't count on it."
Despite all that, a Bloomberg analysis of real-money moves made by his Reno, Nevada firm shows that Navellier is turning tail on some of tech's best-known growth names:

Company

Market Value*

Current Position (Shares Owned)

Change In Position (Shares Bought/Sold)

Chipotle Mexican Grill $74,361,008 241,283 (9,219)
Baidu (Nasdaq: BIDU  ) $68,603,164 489,568 (21,043)
salesforce.com (NYSE: CRM  ) $68,437,390 459,373 (16,643)
AutoZone $65,894,847 223,486 (8,770)
IBM (NYSE: IBM  ) $64,394,037 375,366 (7,988)
Cognizant Technology Solutions (Nasdaq: CTSH  ) $61,097,060 833,066 (38,186)
Estee Lauder Companies $60,436,599 574,547 (20,377)
F5 Networks (Nasdaq: FFIV  ) $56,228,933 510,013 (18,129)
Citrix Systems (Nasdaq: CTXS  ) $56,123,200 701,540 (29,196)
Family Dollar Stores $55,919,425 1,063,916 (45,354)

Source: Bloomberg. *As of the date of this report: Aug. 5, 2011.

Should tech investors be concerned? I don't think so. Navellier never claims to be a market timer in The Little Book That Makes You Rich. Rather, his key principles are either based on or derived from fundamental measures of earnings quality. He's looking for earnings revisions, accelerating revenue and profit growth, strong cash flow, high returns on equity, and related metrics.

He also watches for a history of positive earnings surprises, an approach my Motley Fool Rule Breakers colleague Rick Munarriz also espouses, on the theory that surprising growth will drive Big Money interest and corresponding stock gains.

Pay attention to this metric
Momentum matters, no doubt. Yet I tend to pay closer attention to metrics that demonstrate management competence, such as return on capital. ROC measures how effectively executives deploy debt and equity in generating growth.

Why does it matter? Accelerating gains in ROC typically reflect higher operating margins and thereby higher operating income, cash flow, and (of course) stock returns. Just ask Rackspace Hosting (NYSE: RAX  ) shareholders -- they've enjoyed about a double over the past year as returns on capital widened from 10.9% to 14.4%.

Of Navellier's top 10 sales, only Chipotle and salesforce.com have suffered year-over-year declines in ROC in recent quarters. IBM reversed declines three quarters ago and hasn't looked back since. Cognizant Technology Solutions started a trend of its own two quarters ago, while Baidu has grown ROC as consistently as revenue and now earns more than $0.43 on every dollar of capital it deploys. I dare you to name a tech company that's performed better.

The Foolish bottom line
So while I can appreciate Navellier's approach and history, I'm not buying his sales. In particular, I think now is an awful time to sell Baidu -- and not just because of its rising ROC. There are whole host of other reasons, as Motley Fool Global Gains co-advisor and one-time Baidu skeptic Tim Hanson explains here.

In fact, there isn't a single tech stock on this list I'd sell right now. The same goes for Chipotle, which we own in my wife's IRA. There's either too much growth opportunity left (e.g., salesforce.com, F5) or too much of a track record (e.g., IBM, Baidu, Citrix) to sell when Mr. Market is bingeing on crazy like he is now.

Do you agree? Disagree? Weigh in using the comments box below. And if you're in the mood for more stock ideas, try this free video. You'll walk away with a better understanding of a new computing revolution that's reshaping industries as well as a winning pick from our Motley Fool Rule Breakers scorecard. Click here to start watching -- it's 100% free.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Chipotle and IBM at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Chipotle Mexican Grill and IBM. Motley Fool newsletter services have recommended buying shares of Chipotle Mexican Grill, Baidu, Rackspace Hosting, and salesforce.com. Motley Fool newsletter services have recommended creating an iron condor position in Chipotle Mexican Grill, as well as shorting salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. As you may have noticed, The Motley Fool's disclosure policy means business.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 15, 2011, at 6:34 PM, stan8331 wrote:

    I agree that now is a poor time to be selling, in general. However, it's not necessarily a bad time to have a little cash on hand just in case we see more fear-driven deep dives. I think the salient point is that although this chart shows Navellier is doing some selling, in every case listed the sales are only a small percentage of his total position. It also seems a bit unfair to say he's selling tech, since a number of the companies on the list are not tech-related. Based on what we see here, I would say he's just making some prudent, relatively small adjustments to increase his cash to provide some dry powder in an extremely volatile market.

  • Report this Comment On August 19, 2011, at 5:43 AM, voxraison wrote:

    from aug Conf call:

    free cash flow for qtr $31m (excluding cash for shares issued and related tax benefit). OK lets give it 35% growth, for the year, to give you 168$ m free cash for the year. Using new fully diluted shares of 146million on share price of $118 = mkt cap of $17.2bn. Less cash on balance sheet of 1.3bn gives mkt cap of 15.9bn. SO price/free cash flow on 35% growth in cash flow= 94 times.

    Is that a bargain when market P/Cash is 9-10 times.

    This is laughable, but they did get Metallica (did an analyst actually congratulate them for that, or was i dreaming??) for their dreamforce conference. I'm sure that makes it worth it.

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