Growing Rich - Arabictrader.com

GROWING RICH WITH GROWTH STOCKS
have too many companies growing at more than 30 percent annually,”
she points out. “I really like companies that are well run, make strategic
long-term decisions, and execute their plans well.”
IMPROVING YOUR ODDS
When it comes down to it, though, knowing whether you’ve paid
too much for a stock is really a judgment call every investor must
make each time he or she buys a stock. As any professional will admit,
it’s impossible to ever buy at the exact low, unless you’re extremely
lucky (and it truly does come down to luck). But using these tools
will certainly stack the odds in your favor.
One way Stovall tries to improve his chances of getting a good deal
is by doing what he calls sector analysis research. This involves
looking at how whole sectors are priced compared to the overall
market. It’s the kind of work his son Sam specializes in. Sam is the
sector analyst for Standard & Poor’s. “I try to find groups that are
overpriced, which I avoid, and those that are underpriced, which are
worth looking at,” Stovall explains. “When I find an underpriced
group, I then look further at its past historical relationship with the
market, along with whether it appears to be entering a turnaround.
If so, it may be attractive for purchase.”
To put this into more understandable terms, let’s say Stovall notices
that the airline sector is selling at an overall multiple of 11 times
earnings, while the S&P 500 trades for 20 times earnings. On the
surface, the airlines look like a steal. Stovall then digs deeper to discover
the airline sector’s historical multiple range. If it is 9 to 11 times
earnings, the current valuation is no bargain, since the group usually
sells for a low relative PE anyway. However, if the sector’s historical
PE range is 12 to 18, it’s a great buy at 11 times earnings. From there,
Stovall goes on to handpick companies within the sector. By doing
additional homework, he often finds individual stocks that are even
more reasonably priced. “Once I have the sector that I want to examine
further, I look at the industry’s top and bottom line growth, to see
what’s going on with sales and profits,” he says. “Often this explains
why the discount is so dramatic. Nevertheless, some companies in the
sector are always stronger than others. Those performing better than
average have a definite leg up on the competition. I next examine
59