As a growth-stock investor, I accept more than a few assumptions:
- I am willing to take on extra risk in pursuit of higher returns.
- I place greater importance on future earnings potential than proven trailing metrics.
- I have no problem paying a market premium for stocks poised to grow faster than the general market.
However, there are also more than a few misconceptions about growth investing. Let's go on a debunking expedition to explore three myths that just aren't true.
1. Only growth stocks are risky
I have nothing against value stocks, as long as investors go in with the appropriate expectations. If they believe that value investing means scouring the floor for stock possibilities -- instead of craning their necks to check out the growth universe's ceiling -- they'll likely end up hurting.
Value investing can be risky. Busted growth stocks may implode, but busted value stocks may file for bankruptcy.
Even high-yielding utility stocks can get bumpy. Shares of Great Plains Energy
2. All high-P/E-ratio stocks are growth
As a member of the Motley Fool Rule Breakers newsletter service, I accept that several recommendations have ballooned to trade at lofty earnings multiples.
However, I recall when shares of Coca-Cola
Salesforce.com has reinvented the way enterprise software is delivered. As cloud computing's poster child, it is arming corporations with cost-effective and truly portable web-served corporate applications. Baidu is China's leading search engine, by a wide margin. As the world's most populous nation migrates online, Baidu's growth will continue to explode. The global economy may still be dicey, but Salesforce.com and Baidu grew their top lines by 22% and 60%, respectively, in their latest quarters.
You won't find that kind of octane outside the growth-stock realm. Value hunters, on the other hand, sometimes find themselves paying outrageous multiples for turnaround companies during cyclical lulls that occasionally aren't quite temporary.
Coca-Cola never deserved a 60 multiple, given its slow growth. It's a fairer investment these days, fetching 16 times this year's projected profit and just 14 times next year's target. And, yes, the fact that the earnings multiple shrinks the further you head out means that earnings should be inching higher.
3. Growth stocks are bear market poison
When the going is good, high-beta growth stocks can go on torrid bullish runs. The flipside of that argument would suggest that those same stocks crater during times of economic uncertainty. But reality doesn't always play out that way.
Sirius XM Radio
Netflix provided unlimited DVD rentals and online streaming for less than a night at the movies. Green Mountain's single-cup Keurig brewers and K-Cup refills became residential staples as premium java sippers sought out cheaper and more convenient upscale coffee fixes than heading out to the nearest barista.
All three companies are going strong, even as the recession morphs into a recovery. Sirius XM posted a quarterly profit earlier this month. Netflix tacked on another 1.7 million net subscribers during the first three months of 2010. Green Mountain's fundamentals are also climbing, with revenue and earnings soaring 68% and 90%, respectively, in its latest quarter.
Sirius XM, Netflix, and Green Mountain performed well during the downturn, now they're performing great as they lead the market's recovery.
Keep the lies coming
I don't mind the misconceptions. Ignorance creates greater opportunities for growth investors to profit from the misunderstandings.
Growth stocks aren't always no-brainers. Go back and reread my original bullet points at the top of this article for a fresh reminder of what it takes to be a growth-stock investor. However, after five years of being part of the Rule Breakers analyst team, it remains the best vehicle I know when it comes to identifying Wall Street's biggest winners.
That's no lie.
Join Rick and other growth-aholics for a free 30-day ride on the Rule Breakers newsletter service. Baidu, salesforce.com, and Green Mountain Coffee Roasters are all active recommendations.
Coca-Cola is a Motley Fool Inside Value selection. Netflix is a Motley Fool Stock Advisor selection. Coca-Cola is a Motley Fool Income Investor recommendation. The Fool owns shares of Coca-Cola.
Longtime Fool contributor Rick Munarriz occasionally watches Mythbusters. He does own shares in Netflix, a Stock Advisor pick. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.