John, the key to the buy and hold strategy for growth stocks is that they are fairly valued when you buy them, and they will grow as you own them. Its as simple as that!
If the people doing cash flow analysis are correct, and the stock is fairly valued, then it ought to grow as time goes by and the risk premium begins to drop and future projected growth becomes current earnings.
Here's a very simple example with no risk premium. Suppose you have a bank account with $1.00 in it today, and the bank pays annual interest of 5%. Next year the account will be worth $1.05, and the year after that it would be worth $1.1025, and $1.1576 the year following.
Now suppose that there was a certain degree of risk inherent in the "bank", so depositors now demand 8% "interest" in return for their "deposits". Clearly, we have a risk premium of 3% (8%-5%=3%). But as time goes by, and the "bank" (actually a company) pays "interest" (actually earnings) according to depositors' (actually shareholders') expectations, the risk premium will drop from 3% to perhaps 1 1/2% (that is equivalent to the stock trading at a higher forward-looking P/E).
What I'm talking about here is a developing confidence by the shareholders in the company. Initial skepticism is voiced in terms of conservative earnings forecasts. You have noticed that the bulk of S&P500 companies' earnings exceed analysts' forecasts, but the real key is whether a company meets or exceeds stockholders' expectations. When it does not, the price of the stock goes down regardless of what analysts said.
TTFN,
CTC |
