Floors? Or ceilings? No, this isn't some twisted home decorating version of Chutes and Ladders. It's a question that every investor -- including you -- should consider before taking that next step in the market.
When you step foot into a stock for the first time, do you notice the quality of the floor's foundation, or are you more captivated by the vaulted ceiling? I can tell you how Rule Breakers do it. Sometimes our necks flat-out ache because we've been staring at the seemingly limitless sky.
Growth rules
Let me drum up Pixar (NASDAQ:PIXR) to illustrate why I believe Rule Breaking growth is a superior strategy.
A value investor could have been easily won over by the company at the beginning of 2002. The stock was at $31 and the company had a sparkling balance sheet -- $56 million in cash and zero debt. Moreover, the stock was down because a blowout 2000 ($172 million in revenue) was followed by a shareholder-unfriendly 2001 ($70 million in revenue).
This was a classic value play at the time -- a worthy company with a respectable margin of safety. And in 2002, the stock rebounded. Revenues hit $200 million, largely on the back of Monsters, Inc., and the stock rose 56% over the year.
Levitating off the floor, with its market cap now 14 times sales, a price-to-earnings ratio (P/E) north of 30, and future growth hinging on the finicky entertainment industry, a true value investor would have probably bowed out. The margin of safety was no longer there.
Value investors may have moved on, but Rule Breaking investors were rounding the wagons. I know because Fool co-founder and Rule Breakers lead analyst David Gardner recommended the stock to Motley Fool readers in April 2003. Pixar was defying conventional wisdom and winning over the masses with its computer-generated animation. It was threatening to change movies forever. The company continued to release blockbusters: Finding Nemo in 2003 and The Incredibles in 2004. With this wind in its sails, Pixar even decided to cut ties with partner and industry behemoth Disney (NYSE:DIS).
How has the stock done through this defiant spurt in the company's colorful history? Since the beginning of 2003, it has returned 57%. Since 2002? 180%. And with Pixar finally going its own way, there is a lot more room to run.
More than Apple
Value investors analyze yesterdays. Growth investors speculate on tomorrows. While that does not necessarily excuse a company from jumping through the appropriate fundamental gauges, the workout just isn't as rigorous for the growth camp. It's more about vision and concepts.
Consider Microsoft (NASDAQ:MSFT). During the company's high-growth period, who would have argued that Bill Gates' brainchild was ever fundamentally undervalued using traditional value investing benchmarks? Benjamin Graham would have simply shrugged at its rise. Yet the stock has taken off like a rocket. The shares boast more than 40% compounded annual growth since 1988.
The same can be said for Nucor's (NYSE:NUE) whopping 17% 34-year compound annual growth rate (CAGR) on the back on its innovative minimills. Or Yahoo!'s (NASDAQ:YHOO) 47% CAGR since IPO because of its status as the first Internet directory. Or Intuit's (NASDAQ:INTU) 21% CAGR since IPO from knowing before the rest of the world that individuals needed a better way to manage their finances.
Risk's rewards
Is trolling for Rule Breakers a riskier pastime than angling for value? You bet. Volatility is a given. Yet all it takes is one 10-bagger to offset nine other worst-case-scenario duds that freefall to nil. That's why growth investing is so potent. It's all about the slugging percentage, so swing for the fences in this brave new economy.
Right now, I can assure you that someone is baffled at how a simple online concept like recent Rule Breakers recommendation NetEase (NASDAQ:NTES) can continue to appreciate -- and appreciate it has, to the tune of 40% for Rule Breakers subscribers.
So ... tap shoes or a jet pack? At Rule Breakers, the goal is growth, and we'll be shooting for the sky. To join us, consider a 30-day free trial. In just about a year, we're already beating the market by 9 percentage points, with an upside that is unmatched. You have no obligation to subscribe. Click here to learn more.
All data provided by Capital IQ.
This article was originally published on Jan. 18, 2005. It has been updated.
Longtime Fool contributor Rick Munarriz owns shares of Pixar and Disney. He is a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its stage of defiance. Pixar is a Motley Fool Stock Advisor recommendation. Intuit is a Motley Fool Inside Value recommendation. The Motley Fool isinvestors writing for investors.
