Chapter 6 - Common Stocks Selected For Growth

The most magic word in Wall Street in recent years has been "growth." If you bought "growth" stocks, you were in theory moving along the royal road to riches. So great has been this fetish for growth that new and relatively untested electronic and scientific issues have sold at fantastic prices, sometimes as high as 70 or 80 times net earnings, or with no earnings at all. So although some growth stocks performed daz-zlingly, there can be great peril in paying too much for them, especially if the corporate progress so hopefully predicted may never materialize.

Accordingly, we propose to look into this subject and winnow the chaff from the wheat. What are growth stocks anyway? Why should people buy them? What are their advantages and disadvantages?

A growth company is essentially one that is increasing (or should increase) its sales and earning power at a much faster rate than business in general or than the growth in population. The long-term annual rate of growth in our population is about 3%; and the annual growth in gross national product is now about 3½%. So a growth company should be increasing its sales and net earnings at least twice as fast 7% to 10% at a minimum.

Further, growth companies are usually located in dynamic and often new industries. In the postwar years (1946/56) the oil industry was growing rapidly, and leading oil equities (Gulf, Standard of New Jersey, Amerada, Superior Oil, etc.) were all growth stocks.

After 1956, however, worldwide overproduction appeared and both the industry and, in most cases, the stocks therein lost their growth characteristics.

The Stocks for the Surging Sixties

Every decade has produced its special fashions in financial stock market darlings that advanced on the basis of great enthusiasm for an industry or a particular company. In the early 1920's it was the rails later, utilities, tank and motor shares. In the thirties, re-Organization rails and chemical shares were in vogue.

In the forties, after the war, there was a big upsurge in oil stocks, television shares, and pharmaceutical companies. In the fifties, drug stocks continued in fashion; there was a flurry in uranium; and toward the end of the decade a splurge in camera, electronic, missile, automation, and leisure time shares. IBM, Brunswick, Fairchild Camera, Polaroid, Texas Instruments, Thiocol, and Nafi were fabulous gainers and eager board room favorites.

But what about the Surging Sixties? What will be the companies and the stocks that catch the speculator's eye and rack up the big gains of 200%, 500%, or even 1000%. Our guess would be that automation will continue to surge with robot retailing running into the upper 10 billion. Plastics will take over from glass and metals in many areas, and the myriad electronic companies will be merged into a couple of dozen big ones like Transition. Great advances will be made in energy fuel cells will zoom, solar power will be harnessed, and well solve the water problem by swift conversion of ocean to "branch" water.

Communication will be instant to any point in the world and transport lines to the moon will be available. Cars may well be multiphibious they'll go on highways over rough ground, in water or in the air, and three hundred miles will be easy commuting distance. Life insurance will become the first trillion dollar industry (total insurance in force). Pleasure boating will zoom and marinas become almost as common as motels. By peering in a crystal ball what stocks can we come up with for the next decade. Without a whisper of endorsement or recommendation, here's a list you might want to examine; Ipnics. IBM, Outboard Marine, Rexall Drug, Revlon, Minnesota Mining, Franklin Insurance, Jefferson Standard Life, Texas Instruments, Carter Products, Inc., Lily Tulip Cup, Perldn Elmer Corp., Loral Electronics, Cenco Instruments, Tampa Electric, Universal Match, Air Products Chance-Vogt, Hawaiian Telephone. Corning Glass, American Machine and Foundry, Prentice-Hall, Winn-Dixie Stores. Bear in mind there's no endorsement here: just a list of well-managed enterprises that have done well already and should continue to do so. Good luck but investigate thoroughly before you spend five cents on any stock!

Growth Industries

For the sixties the dynamic industries no doubt include chemicals, natural gas, electronics, scientific companies, finance and insurance companies, plastics, high temperature and corrosion-resistant metals, phar-maceuticals, and a whole series of companies catering to leisure time bowling, sports, boating, travel, photography, publishing, etc. This is quite a list and gives you plenty to choose from. |Equally, coal mining, railroads, probably steel, air transport lines, tobaccos, textiles, commercial banking, oils, and motion pictures are in a less favorable position for above average sustained forward motion in earning power.

The things that mark and set apart individual growth companies might be quickly listed as follows:

1. Management that is intelligent, energetic, eager, and dedicated. One of the basic ingredients of rapid growth is corporate enthusiasm.

2. Capacity and facilities for innovation and research. This research must also be practical and swiftly convertible into profits. (Texas Instruments, Polaroid, and Fairchild Camera do this.)

3. Product excellence in quality, advanced design, superior and more efficient performance.

4. A flair for salesmanship. Look at the way Revlon, Carter Products, Outboard Marine, and Franklin Life sell their wares!

5. Unusual return on capital. The good growth companies will return upwards of 12% net after taxes on net worth each year.

6. Annual increases in net profits of 15% or more.

7. Plowback of earnings. Most growth companies pay out in cash dividends less than 40% of net, retaining the balance for expansion. Some companies, Texas Instruments for example, customarily pay no cash dividends at all and reflect the rise in net worth by stock dividends.

8. Finally, a growth company is a stock-minded one. Management wants to make its money not in salaries but in rapid rises in market value of common stock. Naturally if management is trying hard to make its stock worth more, that should benefit you as an investor.

These traits of growth companies will provide you with some ideas when it comes to selections for your own account. Of course what you're really looking for is a stock that can advance at an unusually rapid rate; and the only thing that will assure that is expanding earning power. The fine growth stocks are all moneymakers!

Historically, growth stocks have recorded remarkable gains in market price. In the ten-year period ended December 31, 1959, the stocks of all of the following companies have advanced by more than 500%
American Home Products
Ampex Corporation Connecticut
General Life Electronics Associates Franklin
Life Insurance Franklin National Bank

International Business Machines

Investors Diversified Service
Litton Industries
McGraw-Hill Publishing Company
Minnesota Mining and Manufacturing
Motorola
Outboard Marine Corp.
Penn Dixie Cement Corp.
Rohm & Haas Company
Texas Instruments
Zenith Radio

This is just a random list of outstanding performers. There are dozens more that could have been included. The point to note is that these are quite well-known companies. It was not required that you search in the byways to come up with an unusually profitable investment. The good ones are there, and always have been, just waiting for you to recognize them. They are there today. So review those indispensable attributes of growth stocks listed in this chapter and apply them to companies that interest you in dynamic industries.

Before you buy, get all the information you can yourself and from your broker. Then do two things: (1) consider the price of the stock you're looking at in relation to present and prospective per share earnings; and (2) virtually ignore dividend yield. About price, many growth stocks sell at 40 to 50 times per share earnings. That's not too high a price for shares in companies growing 30% or more a year. But in general, try to buy a growth stock within 30 times its last twelve-month reported earnings per share. About dividends, if you're looking for a 5% yield on a good growth stock, you'll just never buy one! Remember, growth stocks plow back instead of pay out most of their net. In buying stocks of this sort, what you're purchasing is future earnings not present dividends.

Finally, don't attempt to trade in and out in growth stocks. These are the sort of marketable securities to hold onto for five or more years. Give them a chance to live up to their billing and to make money for you.

Resume

1. Growth stocks are the most glamorous and most profitable.

2. Ignore cash dividends when you buy them.
3. Look for the eight characteristics to be sure it's a growth stock.

4. When you've bought a good growth stock, hang onto it patiently.

5. If you're along in years, immediate income is probably more important and practical than waiting for growth to materialize.

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