Growth stocks have a reputation for being especially risky for investors. But even if you're a relatively conservative investor, there's still ample room in your portfolio for stocks with good growth potential.
Part of the confusion about whether growth stocks can fit a conservative investing model comes from the way people define what a growth stock is. If you try to singularly categorize stocks between growth and value, you'll clearly come away with the idea that growth stocks are the more aggressive of the two categories.
Finding the right growth stocks
However, it's become quite clear lately that the distinction between growth and value stocks is artificial at best. Worse yet, it sometimes misleads investors into thinking that growth stocks can't also be good value stocks. As we've seen recently, traditional value stocks haven't managed to provide much safety for shareholders during the most recent bear market. Meanwhile, many companies with significant growth have done a good job of preserving shareholder value.
In this month's issue of the Fool's Champion Funds newsletter, which rolls off the digital press this afternoon at 4 p.m. ET, Foolish fund expert Amanda Kish takes a close look at one hot sector that has given shareholders exceptional returns during 2009. But in the process, she also raises an important question: Do conservative-minded investors have any business investing in growth stocks?
Dealing with volatility
Conservative investors don't take issue with growth stocks because they're growing; if anything, that trait makes for great investments. But growth stocks can also be much more volatile than shares of more mature businesses.
If a stock maintains strong growth over a period of years, it may rise fairly smoothly. But if it hits a pocket of trouble, high valuations can often come crashing down, giving conservative investors more turbulence than they can handle.
However, in recent years, growth and value have seen their traditional volatilities turned on their heads. Witness these stocks, all of which have seen substantial revenue and earnings growth over the past three years:
|
Stock |
3-Year Revenue Growth |
3-Year EPS Growth |
Beta |
|---|---|---|---|
|
Marvel Entertainment |
24% |
49% |
0.72 |
|
NetEase.com |
29% |
28% |
0.96 |
|
NRG Energy |
22% |
95% |
0.99 |
|
Helmerich & Payne |
25% |
27% |
1.00 |
|
Dolby Laboratories |
22% |
37% |
1.06 |
Source: Motley Fool CAPS.
The beta values indicate that these stocks' strong growth, they haven't shown much more volatility than the overall stock market.
Now, that might not sound like such a great deal, given how volatile the overall market has been in recent years. But when you look at some stocks that would typically fall in the traditional value category, you can see that they've taken shareholders on a much bigger roller-coaster ride than their level-headed history might suggest. In the financial arena, for example, companies like Bank of America
Another way to invest in conservative growth
Individual stocks like those mentioned above provide a desirable combination of both growth and stability. But if you'd rather find a mutual fund that invests in conservative growth stocks, you'll want to check out Amanda's fund recommendations list. There, you'll find a great fund that is well ahead of the S&P so far in 2009, and has beaten its growth-fund peers by more than six percentage points annually over the past decade.
If you want to learn more about this fund -- or are just curious about it's identity -- you're in luck. Becoming a subscriber to Champion Funds couldn't be simpler, and right now, you can get free access by signing up for a 30-day trial. Just click here and you'll be reading Amanda's recommendations in no time.
Even conservative investors can capitalize on great growth stocks. As long as you're aware of the risks involved, and you take steps to control them, there's definitely a place in your portfolio for stocks with good growth prospects.
More on funds that provide smart investing opportunities:
- How to capitalize on the coming recovery.
- This is what wealthy investors are doing now.
- You'll want to stay away from this stupid investment.
