This Is What a Real Growth Opportunity Looks Like

If you wanted to add some growth to your portfolio, you might consider the Vanguard Growth Equity fund. After all, it's an "aggressive" fund that seeks "long-term capital appreciation." And yes, its top holdings do seem like they'd be good ways to get growth:

Stock

Weight Within Fund

Baxter International

3.2%

Cisco Systems (Nasdaq: CSCO  )

3.1%

PepsiCo (NYSE: PEP  )

2.6%

Walgreen

2.6%

Berkshire Hathaway

2.5%

Progressive

2.4%

Google (Nasdaq: GOOG  )

2.4%

Johnson & Johnson (NYSE: JNJ  )

2.3%

Oracle (Nasdaq: ORCL  )

2.3%

Apple (Nasdaq: AAPL  )

2.1%

Data from Vanguard.

But now let's take a look at just how much growth analysts actually expect from these companies:

Stock

Analyst 5-Year Growth Estimate

Baxter International

11.5%

Cisco Systems

11.25%

PepsiCo

10.75%

Walgreen

14.22%

Berkshire Hathaway

5%

Progressive

6.53%

Google

21.34%

Johnson & Johnson

7.54%

Oracle

12.19%

Apple

18.16%

Average

11.85%

Data from Yahoo! Finance.

Now, we all know that securities analysts are notoriously off in their projections, but let's assume that when we average together dozens of forecasts for these high-profile stocks, we at least end up in the ballpark. Assuming that, is 11.85% really the magnitude of growth you'd like to get out of your aggressive growth stocks?

If you're happy with 11.85%, then you can stop reading and stick with your high-profile "growth" stocks. But if you're looking for more, I recommend you read on.

Still with me?
The recipe for truly high growth has a handful of necessary ingredients. They are:

  1. A small company
  2. A wide market opportunity
  3. Meaningful macroeconomic tailwinds.

Think, for example, of Amazon.com (Nasdaq: AMZN  ) when it launched in 1995. It was a tiny company, one of the first e-tailers, and it had the rising tide of the Internet -- merely the greatest development of the past 25 years -- helping it along. Now ask yourself: Do any of the companies or industry opportunities in the table above fit that profile at all?

Let me introduce you to one that does
Now consider something like the pharmaceutical industry in India. Today, on average, Indians spend $10 per person per year on drugs. Americans, on the other spend, more than $750! That means the Indian pharmaceutical market needs to grow some 7,400% in order to be as big as the U.S. market is today.

This won't happen next year, or even over the next 10 years. Furthermore, because of discrepancies in purchasing power, the Indian pharmaceutical market may never reach the size the U.S. market is today. But let's assume it takes 25 years for the Indian market to reach half the size of the U.S. market. That would mean industry tailwinds of 15.6% annual growth ... for 25 years!

As for who benefits, think about a company like Dr. Reddy's Laboratories (NYSE: RDY  ) . Although this Indian company is earning most of its revenue today in Europe and the United States selling low-cost generics, it's positioned extremely well to benefit from sales in the Indian market as it grows. It's a domestic company, so it knows the market well, and it specializes in marketing the low-cost drugs that are likely to sell best in India.

This, in other words, is what a real growth opportunity looks like. Dr. Reddy's is a small company with a wide market opportunity that stands to benefit from meaningful macroeconomic tailwinds.

Looking for more?
At Motley Fool Global Gains, we believe that real growth opportunities are available over and over again in the world's emerging markets, simply because these markets are creating so many meaningful economic tailwinds these days. If you'd like to see our other picks from India, China, Brazil, Indonesia and more, simply click here to join Global Gains free for 30 days.

There is no obligation to subscribe.

Tim Hanson is co-advisor of Motley Fool Global Gains. He owns shares of Berkshire Hathaway. Berkshire Hathaway is a Motley Fool Inside Value recommendation. Google is a Rule Breakers pick. Apple, Amazon.com, and Berkshire Hathaway are Stock Advisor selections. Johnson & Johnson and PepsiCo are Income Investor recommendations. The Fool owns shares of and has written puts on Oracle. The Fool owns shares of Berkshire Hathaway. This is what the Fool's real disclosure policy looks like.


Read/Post Comments (9) | Recommend This Article (73)

Comments from our Foolish Readers

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 January 15, 2010, at 4:37 PM, smersche wrote:

    What do other developed nations spend on prescriptions per year? My guess is no nation spends anywhere near as much as the US. I'd be surprised if India's prescription drug market ever reaches half the size of the US market.

  • Report this Comment On January 15, 2010, at 8:49 PM, xetn wrote:

    Most of the spending on health care around the world is buried in government spending. For example, Sweden pays on average about 55% of their gross income in taxes which includes their "free" health care.

    But the amounts spent sort of begs the question, what is the cost of living? According to several sources, the average income in India is $500. per year, so $10.00 per month for drugs seems quite high at almost 25%. It seems to me that there are gross errors some where (either income of amount spent on drugs).

  • Report this Comment On January 16, 2010, at 3:44 AM, barryvision wrote:

    I think Google,Amazon and Pepsi have great focused managements wwhich is the secret of ultimate success

  • Report this Comment On January 16, 2010, at 8:40 AM, Friendlysurfer wrote:

    For once not! I do follow FOOL recommendations and have 2 payed services from you. And thanks a lot, I did make lots of money with most recommendations I choose to follow. +105% in 2009. However, I do not consider RDY a stock to buy, with all respect.

    (a) Fundamentaly VERY expensive

    (b) not small,

    (c) highly competitive market

    (d) room for growth is not above average

    For certain NOT a buy, else I am missing the point. But thanks for many other excellent recomendations.

  • Report this Comment On January 16, 2010, at 9:37 AM, grantrobertb wrote:

    Reddy? Perhaps it is a good stock, and perhaps it does illustrate the author's point about "real growth opportunity". Speaking for myself, I know there are many good medications. But like someone said -- everything in moderation, nothing in excess. America is an overly medicated society. We want a pill to fix everything. Doctors, knowingly or unknowingly have become drug dealers for pharma. I personally don't like the idea of investing in something, hoping more people will need Rx medication. For me, investing in something that prevents illness seems like a better growth opportunity. Maybe something like a Gold's Gym, etc. would be something good to look at. Does India have a national chain of Health Spas :)

  • Report this Comment On January 16, 2010, at 11:08 AM, Foolishboomer wrote:

    Americans are too dependent on pharmaceuticals. Outside of antibiotics, how many pharmaceutical products actually cure anything? They merely control symptoms, while adding side effects to the mix, which need more pharmaceutical products etc, etc, etc. In India, as in China, natural treatments are used to cure conditions. My opinion is that pharmaceuticals will never grow to a great extent in those highly populated countries and with good reason. It's sad that in this country, pharmaceutical companies fund medical schools. That's why your doctor greets you with prescription pad in hand.

  • Report this Comment On January 17, 2010, at 5:23 PM, bigcat1969 wrote:

    Forgive my going down this rabbit trail, but the irony is that alternative health folks in America are exactly the same as the regular MDs. The biggest health food store in my area is virtually split 50/50 between health food and pills. My folk's 'doctor' has them taking something like a 100 pills a day, some of them to be taken 5 pills 3 times daily. If such companies are public, invest in these 'health-care firms' in China and India, they go back the guys selling fire-water as cures. Imagine the profits, no R&D costs, no regulation and expensive products sold to folks with complete belief in the products.

  • Report this Comment On January 17, 2010, at 10:27 PM, professorjimB wrote:

    To xetn: You are right, there are errors -- $10 per person per year on an annual income is only 2%. Still higher than other developing countries.

    To bigcat1969: You are right, many of the alternate health care providers do rely on pills. What you may not know is that many of these pills are herbs, not meds. I take 4 different ones myself and am grateful that I don't have to "cook" them myself.

    I have one other reason for not investing in India's drug companies. They (as a class) have no respect for US copyrights and patents. Many of the India drug companies are selling over the Internet with generic knockoffs that are legal in India but not in US. So buying from them is tantamount to conspiracy to break the laws. Maybe the laws should be changed? But until they are, I can't support an investment in illegal behavior.

    Oh, and I don't own tobacco or tobacco holding companies either.

  • Report this Comment On April 09, 2010, at 6:47 PM, GreenChilePepper wrote:

    Wow! Where did all the haters come from? I love RDY as a way to invest in India. Drugs are generally good when used correctly, especially in developing and populated countries where disease and health care limitations can be a problem.

    Also, I love that Tim personally visits the companies and countries that he recommends. If there was something fishy with RDY, I completely trust that Tim would smell it.

    Keep up the good work Tim. Global Gains is my favorite newsletter!

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