How many of us actually follow Warren Buffett's advice? You know, the advice that says to be greedy when others are fearful?
I ask because, if we really are students of Buffett and other investing greats, then now's the time to be diving in -- the time when Ben "Helicopter" Bernanke is diving for the corner, huddled in the fetal position. It's times like these when investors sour on even sustainable growth stories. Behold:
|
Company |
YTD Return |
5-Year Growth Estimate |
|---|---|---|
|
Baidu.com |
(37.0%) |
60.2% |
|
VMware |
(26.7%) |
44.6% |
|
Salesforce.com |
(13.1%) |
46.1% |
|
Research In Motion |
(19.2%) |
38.1% |
|
VASCO Data Security |
(38.5%) |
34.7% |
|
Garmin |
(32.5%) |
19.9% |
Don't cook your brain trying to figure out why these stocks fell so far, so fast. The market can dump even the best growth stocks when volatility rears its ugly head. Does this mean that the long-term potential of these firms has changed?
Of course not. Businesses simply don't change as fast as Mr. Market's gyrations might lead you to believe.
Growth stocks always go down
Take a look at this chart for customer management specialist Salesforce.com. It's like looking at waves crashing on a beach, isn't it? Some of the stock's more pronounced crests:
|
Open Price |
Date |
Close Price |
Date |
Total Return |
|---|---|---|---|---|
|
$41.60 |
Jan. 30 '06 |
$21.85 |
Jul. 17 '06 |
(47.4%) |
|
$39.35 |
Nov. 30 '06 |
$36.07 |
Jan. 3 '07 |
(8.3%) |
|
$48.90 |
Feb. 14 '07 |
$41.57 |
Mar. 5 '07 |
(15.0%) |
An even better example might be Amazon.com, which has seen more than its share of haircuts. I count at least four 20%-or-greater drops in price between 2003 and now. Volatility, thy name is Amazon.
And yet few stocks have performed better than the e-tailer over the past five years. Amazon is up more than 250% since the dawn of 2003.
Think about that for a minute. Now, revisit our first table. Like Amazon, all of those stocks still look expensive as measured by the P/E ratio. But maybe those "premium valuations" are, in fact, pretty darn reasonable.
When numbers lie
You think I'm nuts to call a stock like VMware, with its 102 P/E, "reasonable"? So be it. But you'd have to take equal issue with those who were early investors in -- and who have made a lot of money owning -- Salesforce.com, Research In Motion, and Baidu.
That's why David Gardner and the rest of us on his Rule Breakers team are unafraid to pay a premium for top stocks in fast-growing industries, whose competitive advantages appear sustainable. Greatness is very often worth it.
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Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Amazon, Garmin, and VASCO are Stock Advisor recommendations. Baidu is a Rule Breakers pick. The Motley Fool has a disclosure policy.
