Mohan....cover story from Individual Investor magazine
excerpted;full story at iionline.com
Cover Stories:
• Is It Too Late?
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Is It Too Late?
Catching highfliers now may still be smarter than waiting for the perfect moment that never comes.
by Andrew Feinberg
Like the White Rabbit chasing after the market's highfliers, investors often mutter "I'm late, I'm late." And the higher those stocks soar, the later the investor feels.
In fact, the longer an investor harps on the past, the harder it is to pull the trigger on some of these stocks. When Dell put together back-to-back share-price gains of 81% and 69% in 1994 and 1995, what kind of glutton could have asked for more? When the stock went on to return 207% and 216% in 1996 and 1997, any reasonable person would have thought he had missed it for good. But great companies don't just keep doing well, they do even better. In 1998 Dell shares shot up 248%.
People who think only in terms of share-price appreciation often fail to invest in great stocks because they fail to consider the fundamentals, and because they are frightened of compounding the error of not buying in early. It is bad enough to have missed Dell's move, they figure, but it would be truly horrible to buy it at the top and then ride it down.
"What's past is past," says L. Roy Papp, co-manager of the Papp America-Abroad fund. "If you want to make money in the market you have to look through the windshield, not into the rearview mirror." That means thinking of Dell not as a company whose stock has rocketed, but as one that is reshaping an entire industry and that is, quite frankly, the best at what it does.
It's hard to step up and buy the great growth companies, but it's something you have to do," says Ronald C. Ognar, manager of the Strong Growth fund. "Then you hold on and let them work for you--and don't bail out if there's a downturn. The greatest risk with these stocks is that you'll never own them because they always seem expensive.Great stocks always have higher valuations than do lousy stocks.
Investors who say they'll buy the great growth stocks when they become cheap often are kidding themselves. "More money has been lost waiting for a correction in stocks like these than has ever been lost in the inevitable correction," says Erik P. Gustafson, portfolio manager of the Stein Roe Growth Stock fund.
Investors find it hard to buy when the blood is really flowing in the streets, yet most successful growth managers say you should worry more about whether you're buying a great company with an outstanding future and less about the price at which you acquire its shares. Fabulous earnings eventually will justify your purchase price. As Peter Lynch, the legendary manager of the Fidelity Magellan fund, wrote in Beating the Street (Simon & Schuster, 1993), "Time is on your side when you own shares of superior companies."
Many investors wrongly assume that a popular stock's future growth already has been discounted by the market. But that often is not the case, as Philip A. Fisher pointed out in his 1958 classic, Common Stocks and Uncommon Profits (John Wiley & Sons).Here's an example of how that might work. Although Dell's earnings growth is slowing from a current rate of more than 60%, analysts think the company can sustain average annual gains of 32% for the next five years. That would mean earnings per share of $4.46 in 2003, up from $1.47 in 1999. If you buy Dell, you are essentially making a call on how much those future earnings are worth today. To determine their value, analysts typically use a discount factor--the yield on the 30-year long bond (or the risk-free rate of return), plus some measure of risk. The bigger the discount, the more conservative analysts are being. A conservative discount rate of 15% suggests Dell's future earnings are worth $2.32 today. With the stock recently at $80, investors are paying a multiple of 35 for those earnings--reasonable considering Dell's current p/e of 54.
A great brand name is often a barrier to entry as well. Consider Dell. On one level, Dell sells commodity products and simply manufactures them better than anyone else. But the company actually represents much more than that. Devoted customers love Dell's service and the ease of doing business with the company. Simply undercutting Dell's prices wouldn't be enough to allow a competitor to steal much of Dell's business.
In this time of economic turmoil when most PC makers have stumbled, Dell hasn't missed a beat. Revenue is climbing at a 50% clip, and earnings are growing even faster, at 65%, thanks to Dell's ability to squeeze suppliers and keep costs low. The company's business model, of configuring computers according to customers' exact specifications, enables it to avoid the inventory risk that plagues other PC makers, such as Compaq Computer. (Dell turns over its inventory in one week; most competitors are thrilled to do that in four weeks.) Compaq Computer is again making noise that it will go head-to-head with Dell, but it has failed to deliver on those threats in the past.
It's true that circumstances surrounding Dell's suppliers are worrisome. As disk drive makers get healthier, for example, Dell won't be able to secure fire-sale prices, and profit margins could deteriorate. But there is a huge market for Dell abroad and in cyberspace, and that practically ensures strong growth over the next few years.
Year Price (12/31) Gain
Jan. 96 - Jan. 99
1994 $1.28 80.3%
1995 $2.17 68.5%
1996 $6.64 206.0%
1997 $21.00 216.3%
1998 $73.19 248.5%
Is it too late? NO.
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