I thought some might be interested in this, for some independent views on how to evaluate growth companies. If I read it right, my rules of thumb have been conservative. FWIW.
[BusinessWire:Banking-1001.171] 10/1/96
(MONTGOMERY-SECURITIES) Montgomery Securities Shares "Power of
Growth" Investment Theory with Conference Attendees
Business Editors
SAN FRANCISCO--(BUSINESS WIRE)--Oct. 1, 1996--Declaring that
"earnings growth ultimately drives stock price," Montgomery
Securities Senior Research Analyst Michael Moe outlined the firm's
core investment philosophy of the "Power of Growth" at Montgomery's
26th Annual Investment Conference, being held in San Francisco this
week.
The conference, featuring 233 of the nation's leading growth
companies making presentations to growth-oriented institutional
investors, is the largest investment conference dedicated
exclusively to growth companies.
Moe provided investors with compelling evidence of the thesis
that there is an "essentially 100 percent correlation" between
earnings growth and long-term stock price appreciation. To back up
his assertion, Moe presented the results of a 10-year study of
growth stocks (1985-1995), in which the stocks that made the Top 20
averaged 44 percent annual earnings growth. These same stocks
-- which included Microsoft Corporation, Amgen, Home Depot, Adobe
Systems and Applied Materials -- posted an average increase in stock
price over the same 10-year period of 59 percent.
Moe pointed out that such stocks are rarely cheap -- the average
price/earnings ratio of these same stocks during the period was 90
times trailing year's earnings. He also noted that the stocks in
the Top 20 began the 10-year period with an average market value of
$110 million. Therefore, he asserted, "our conclusion is that if
one is trying to find the companies that will appear on this list in
10 years, one should not look in the bargain basement for low P/E
ratios, but should instead focus on smaller companies with dynamic
and sustainable earnings potential."
In another analysis, Moe compared the return $1 invested in
January 1990 would have yielded over the past six years. That
dollar would have yielded $1.86 in returns if invested in the stocks
of the Dow Jones Industrial Average, but it would have yielded a
much more robust $10.56 if invested in the stocks that comprise
Montgomery's universe of technology stocks and an astounding $15.23
if invested in the stocks in Montgomery's current health care
universe.
Moe outlined the fundamental characteristics Montgomery seeks
when identifying future high-growth companies, summarized as "The
Four Ps -- People, Products, Potential and Price."
The first and most important element is the people behind the
venture, he said, which he estimated accounted for 60 percent of the
success of a growth company. "Winners find a way to win," he said.
Moe treated investors to an analysis of the fortunes of two unusual
growth companies -- the Boston Celtics and the Chicago Bulls of the
National Basketball Association. Prior to the addition of Larry
Bird and Michael Jordan, respectively, both were near the bottom in
terms of performance. The additions of one key player in each case
was the catalyst for the tremendous success recently enjoyed by both
teams.
Montgomery also seeks companies with proprietary products that
give them a leadership position in their industry or niche, or "one-
of-a-kind" products. To reach their growth potential, small, growth-
oriented companies should take advantage of large markets and
capitalizing on emerging trends. Among the trends Moe and
Montgomery are watching include the rise in capitalism around the
globe, the explosion in communications technologies, the aging of
the Baby Boom generation, as well as the huge numbers of young
consumers in the MTV-generation, which Moe labeled "Generation
2000."
Finally, Moe said, Montgomery looks for a reasonable current
stock price; Moe defined that as a price that reflects a P/E ratio
for its coming year's earnings that is equal to or less than its
projected earnings growth rate. Montgomery also factors in external
forces that affect stock values, including interest rates and the
supply and demand of equities in the capital markets.
Moe's conclusion is that "earnings growth and stock appreciation
run in tandem," which is why Montgomery focuses on growth companies
when seeking suitable investment opportunities for capital
appreciation for its clients.
Montgomery Securities is one of the nation's premier investment
banking and institutional brokerage firms. Dedicated to growth
companies, Montgomery combines focus and specialization in Research
and Investment Banking with bulge-bracket capabilities in Global
Distribution and Large-Block Trading.
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