Boring Portfolio

Growth at Reasonable Price
...that's where the value is

by Mark Weaver (

SPRINGFIELD, IL (Sept. 3, 1998) -- The market fluctuated in a large range but stayed on the loss side all day. At the end of the day the equilibrium of fear and greed once again shifted to the side of fear. The usual culprits were to blame for today's drop, a devalued ruble, losses in Asian markets, Latin American rumbles and the spectre of declining profits for U.S. corporations.

For the day, the S&P 500 lost 0.83%, the Nasdaq dipped 1.32% and the Borefolio followed them dropping 1.28%. The weary small-cap market continued its trend of under-performance, losing 1.8%. Even in today's declining market the large-caps are outperforming on a relative basis.

Borefolio losers outpaced gainers 7 to 1. The lone winner was Borders Group (NYSE: BGP), rising $3/8.

In the news, Carlisle Companies (NYSE: CSL) announced that its Tensolite Company acquired Quality Microwave Interconnects, Inc. This privately held company makes microwave coaxial cable connectors and assemblies for telecommunications, computer and test measurement industries. On the surface this looks like a good fit for Carlisle. Terms of the deal were not disclosed. Carlisle's stock fell another $3/4 today.

Today First Call reported that earnings estimates for the S&P 500 for the 3rd quarter indicate that only 2.1% growth is expected. The economy is apparently slowing significantly. This does not bode well for stock prices over the short term. Are there stocks which hold up better during times like these?

Classic value investing emphasizes picking stocks based on a low price-to-book ratio, low price-to-earnings ratio (P/E), high dividend yield and a low price-to-sales ratio. All of these measures are useful in picking stocks that have underlying fundamentals which will support the stock price. Logic would seem to indicate that in down markets picking stocks which have these strong underlying fundamentals would be the safe thing to do. The basic idea is that value stocks should be a safer haven, right?

Well, as it turns out, maybe not.

In an article published in Barron's Online earlier this week, Kari Bayer, a quantitative strategist for Merrill Lynch, indicates that growth investing actually bests value investing in down markets. This finding is based on the performance of growth versus value mutual funds during times when profits are declining. When the economy slows, growth stocks tend to slow less than the more classic value stock. On the other hand, in times of profit acceleration, value tends to win.

This data would indicate that it may be premature to get out your copy of Graham and Dodd's Security Analysis and go fishing for value stocks. If this study is accurate an investor would be better off looking for growth stocks. Now, this market has been led by growth stocks and, to these eyes, many of the great growth stories remain a bit richly priced. That said, there are many good growth companies that trade at below market multiples and at a discount to their rates of growth. Those stocks would appear to be safer havens in these difficult times.

Looking at the Borefolio I see opportunity in the shares of Borders Group. Here is a great growth stock trading at a significant discount to its long-term growth rate. In a slowing economy consumers will continue to look for low prices and value when shopping. Borders and other superstores should continue to grow even in slower economic times.

Carlisle Companies is another Borefolio stock where you can get steady growth at a reasonable price. Even though the economy may be slowing, recent measures of building activity have not slowed at all. Carlisle is expected to continue its steady growth over the year ahead.

The bottom line, pay attention to valuation but it may be premature to buy "value" stocks. Growth at a reasonable price is a mantra worth repeating. If you happen to be inclined to "bottom fish" in this volatile market you might want to keep this in mind. As usual, keep your investment eye trained on the far horizon. Buy the stocks of good growing companies at reasonable prices and ultimately you will create wealth. And that is the point of investing after all.

FoolWatch -- It's what's going on at the Fool today.

09/03/98 Close

Stock  Change    Bid 
 ANDW  -  15/16 13.00 
 CGO   -1 3/16  23.69 
 BGP   +  3/8   23.00 
 CSL   -  3/4   36.75 
 CSCO  -1       90.63 
 FCH   -  5/16  21.25 
 PNR   -  1/16  29.56 
 TBY   -  3/8   6.38 
                   Day   Month    Year  History 
         BORING   -1.28%   5.95% -17.66%   3.61% 
         S&P:     -0.83%   2.58%   1.22%  58.02% 
         NASDAQ:  -1.32%   4.85%   0.09%  51.00% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93     90.63   152.20% 
   2/28/96  400 Borders Gr    11.26     23.00   104.33% 
   8/13/96  200 Carlisle C    26.32     36.75    39.60% 
    3/5/97  150 Atlas Air     23.06     23.69     2.73% 
   4/14/98  100 Pentair       43.74     29.56   -32.42% 
   5/20/98  400 TCBY Enter    10.05      6.38   -36.54% 
   11/6/97  200 FelCor Sui    37.59     21.25   -43.47% 
   1/21/98  200 Andrew Cor    26.09     13.00   -50.17% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  13593.75  $8203.76 
   2/28/96  400 Borders Gr  4502.49   9200.00  $4697.51 
   8/13/96  200 Carlisle C  5264.99   7350.00  $2085.01 
    3/5/97  150 Atlas Air   3458.74   3553.13    $94.39 
   4/14/98  100 Pentair     4374.25   2956.25 -$1418.00 
   5/20/98  400 TCBY Enter  4018.00   2550.00 -$1468.00 
   1/21/98  200 Andrew Cor  5218.00   2600.00 -$2618.00 
   11/6/97  200 FelCor Sui  7518.00   4250.00 -$3268.00 
                              CASH   $5750.59 
                             TOTAL  $51803.72