Growing Rich - Arabictrader.com

KIRK KAZANJIAN
companies in the same industry,” she says. “I then compare this information
to the company’s historical valuations and estimated future
growth rate. Ideally, you want to find a stock selling at a discount to
its growth rate, or at least selling at a multiple to growth that is less
than that of the S&P 500. In essence, I’m forecasting the future from
the bottom up. But it’s also important to look at companies in the
context of the world in which we live.”
Robert Stovall’s first step in evaluating the attractiveness of a stock,
in terms of its price, is to see what the company’s projected earnings
growth rate is compared to its PE ratio. Remember that the ultimate
value of a stock is the sum total of its future stream of earnings and
dividends. If the growth rate is higher than the PE ratio, that’s a good
sign. In fact, the higher the better. In other words, all other things
being equal, a stock growing at 25 percent a year with a PE ratio of
16 is much more attractive than one growing at 20 percent a year
with the same PE. “Next I look at whether the company is experiencing
rising sales,” he adds. “If sales are going up, but earnings aren’t, I
want to see whether there’s a good chance earnings will catch up to
this growth, and if not, why. Therefore, sales per share, which is determined
by taking a company’s total amount of sales and dividing
it by the number of outstanding shares, is an important number. I
also want to see if the stock has a dividend, and if so what the yield
is. I like stocks that pay dividends because if you’re wrong on the
timing, the dividends give you extra breathing room while you wait.”
Of course, most companies don’t pay much in the way of dividends
anymore, opting instead to invest extra cash in the business or use
it to repurchase shares on the open market. For this reason, Stovall
keeps a generous helping of convertible bonds and preferreds in his
portfolios. Many of these instruments offer yields of between 4 and
7 percent with appreciation potential, albeit not as much as you would
enjoy from owning the common stock.
LESSONS OF A GO-GO
As you know, Davis learned a great deal about how not to invest
while buying go-go stocks during New York Venture’s early years. “I
was picking them the same way many younger managers do today,
namely by saying a stock is cheap if it’s selling for twice its growth
rate,” he says. “My attitude was if the multiple was one or two times
194