Growing Rich - Arabictrader.com

KIRK KAZANJIAN
for them,” he says. “I want to purchase them at roughly a market
multiple. On the other hand, if I buy damaged goods or companies
in real trouble, I can get them cheaper. But then I have other problems
and risks to deal with,” such as the fact that the price might go much
lower. Specifically, Papp looks for stocks with earnings-growth rates
of 12 to 15 percent selling at the same PE multiple as the S&P 500.
“Obviously the more growth the better, but I’m not willing to pay 35
or 40 times earnings for it,” he explains. “When you’re willing to pay
only a market multiple (which is around 25 as this book goes to press),
you’re not going to find stocks growing at 35 percent a year. Those
companies are much more expensive. The trouble is, if you pay 30
times earnings for a stock, chances are that growth won’t be sustained.
Something will come along to interrupt it, and the stock will really
get hit. That’s why I stay away from them. If I can buy a superior
company at roughly a market multiple, I’m happy.”
This market multiple guideline isn’t always a practical one to follow.
For example, banks as a group normally sell at a below-market multiple
anyway, as do many automakers, restaurants, and utility companies.
Therefore, the nature of a company’s business may force you
to reevaluate your definition of a fair price. For this reason, Papp often
compares the valuation of a particular company with that of its closest
competitors to see how the multiple and earnings growth rates of the
two businesses compare. In some cases, the result causes him to buy
another firm in the industry instead.
INDUSTRIES TO AVOID
“There are many companies and industries I simply won’t touch,”
Papp reveals. “For 40 years, the airline industry has never made any
money, so that’s a good one to stay away from. I don’t want to own
steel or extraction companies either, because I don’t think there’s a
lot of growth there. I further don’t want to own commodity businesses,
because you have no control over prices. And if a stock sports a priceearnings
ratio above the overall market, I normally won’t buy it.”
In addition, since Papp is convinced market timing doesn’t work,
he avoids cyclical companies altogether. “Take paper manufacturers,”
he suggests. “You play the cyclical game by buying these stocks when
they are priced low and selling them when prices rise. That’s the same
thing as market timing, only you’re confining yourself to one stock
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