Growth and Value Stocks
C.R. Bard (BCR), Google (GOOG)
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First, let me wish you a wonderful Thanksgiving holiday, with all the turkey and pumpkin pie you can eat, and just a little more; all the family visiting you can enjoy, and maybe just a little less; and either all the football you can possibly watch, or all the shopping trophies you could possibly wish for, depending on your taste in leisure activities.
I can assure you that I will be doing great damage to one turkey drumstick, and will be up to my elbows in dressing, candied sweet potatoes and my wife’s matchless pecan pie.
Then, although I would rather follow in my father’s footsteps and take a nap, I will enjoy the company of our guests, while we swap yarns and take a crack at a few pumpkin carols.
When we trade stories of what we’re grateful for, I’ll give thanks for the opportunity to edit the Cabot Wealth Advisory and to contribute to lots of other Cabot advisories. I enjoy writing for you, most especially when I hear from you. You can always drop me a line by responding to this email. And I promise I’ll write back.
Now, it’s time to wrap up the series I’ve been doing on stocks that share both growth and value characteristics. Today, I’m featuring two stocks whose price increases have made them a tough choice for value investors.
By now, we’ve learned that pigeonholing stocks as either growth or value is a little misleading, because stocks can slip from one category to the other and back again.
U.S. stock markets have been in an uptrend for many months, lifting the prices of many stocks to new highs, which is great news for growth investors.
But for value investors, it means that the supply of undervalued stocks has been dwindling, reducing opportunities for safe, low-risk, long-term investing. It’s gotten to the point that Cabot’s value guru, Roy Ward, has reduced his exposure to stocks to just 37.5%, which is well below the 75% equity allocation he recommends when the markets are low and undervalued. And if the markets continue to rise, Roy may get down to a 25% weighting in moderately aggressive stocks, which is his theoretical lowest weight.
For growth investors, price increases can also be a problem, although it’s a nice one to have. When stocks are recommended for Cabot Top Ten Trader, they are assigned a buy range, which is a way of controlling the risk of an initial buy; even growth investors try to buy on reasonable pullbacks.
My first stock is C.R. Bard (BCR), a stock that Cabot Benjamin Graham Value Investor says is well above its Minimum Sell Price and should be sold. The MSP is 127.16, and the stock is actually selling at around 139, which is well above its sell price and way above its Maximum Buy Price of 90.64. So, according to Roy’s value principles, BCR is just too expensive to buy, and it has been since it last traded below 90, which was in January 2012.
But I’d like to point out what happened as BCR made its transition from being a value stock to becoming a growth stock. Here’s a chart that will show what I mean.
BCR broke out of a six-month correction as 2012 began, running from 80 in October 2011 to as high as 107 in June 2012. But at that point, the stock began a consolidation that had it trading increasingly tight at around 100 in March and April 2013. The jumpy rally that began in April pushed the stock to 120 in September.
Then came the late-September breakout that blew the stock past 120 to 136 on giant volume. That’s the rally that qualified BCR for inclusion in Top Ten, because it added price momentum to the stock’s already attractive combination of story (C.R. Bard is a medical device maker with solid offerings in vascular, oncology, urology and surgical specialties) and numbers (steady growth in revenue and earnings and a 0.6% forward annual dividend yield).
Great growth stocks must have it all, story, number and chart.
BCR has continued to push higher since its October 23 gap up on spiking volume.
But the interesting thing to me is that the stock will not be included on page 12 of Cabot Top Ten Trader. That’s because the stock was given a suggested buy range of 133 to 136 when it appeared in the November 4 issue. And the stock never traded in that range. BCR closed at 138 on the day the new Top Ten came out, and in the next two weeks, it just kept rising. So BCR, which continues to do well, has fallen into the crack between value and growth, too expensive to qualify as value and too fast-moving to pull back to its growth buy range.
So it goes. Markets do funny things.
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For the tenth stock in the series, I’m going to feature Google (GOOG), one of the highest profile tech stocks in the world. And I’m going to be both brief and decisive, because the story of Google has one big lesson to teach.
Roy Ward’s list of the Top 275 Value Stocks says that the Maximum Buy Price for GOOG is 630.75 and the Minimum Sell Price is 997.52. That’s simple enough.
But when the November issue of Cabot Benjamin Graham Value Investor came out, GOOG was already trading at 1027.04. And it has since climbed to around 1045. So Google continues to climb farther and farther beyond the level that made it attractive to a value investor. The last chance you would have had to buy GOOG as a value stock would have been at the end of November 2012.
As you’ve probably noticed, a value investor who bought GOOG at 663 and sold it when it topped 997.52 in the middle of October would have booked a very attractive profit of around 50% in just a little under 11 months!
Value investors are often told to be patient and wait for the valuation metrics to do their work, but value stocks can also move very quickly when conditions are right.
The growth proposition for GOOG is complicated. Google was first covered by Cabot Top Ten Trader back in June 2005 when the stock was trading at 290. I haven’t looked up the records, but the stock was probably dropped from Top Ten in early 2006, when it fell from 466 in January to 340 in March.
The stock made a nice run in late 2007, but went over the falls in 2008, dropping like a lead weight during the Great Recession. GOOG eventually fell from around 700 to below 250 in November 2008.
But the stock came back, showing up in Top Ten in October 2009 (trading at 552), October 2010 (618), December 2011 (622), September and October 2012 (750 and 741) and October 2013 (1004).
The big lesson to learn from all these widely spaced appearances among the top growth stocks of the entire market is that growth stocks are volatile. You don’t buy and hold them as you would with dividend-paying stocks (GOOG doesn’t pay a dividend). And you don’t buy them and then sell them when they hit a set valuation level as you would with a value stock.
Stocks go through cycles of price appreciation, which makes them look good to growth investors, and cycles of price decline, which makes them more attractive to value folks. The key is to find high-quality companies with strong growth potential, then identify the right price point to buy them.
Google shares are owned by 1,667 institutional and mutual fund investors, who hold 87% of the total float. Such a high level of ownership by whales actually makes GOOG a little less volatile than the market as a whole. But growth investors still have to contend with fluctuations caused by disappointing (or encouraging) quarterly earnings reports, macroeconomic news, challenges from competitors and a host of other variables.
For myself, GOOG isn’t quite my cup of tea right now. Companies with a market capitalization of $292 billion and sales of over $57 billion don’t usually have the upside potential I’m looking for. On the other hand, a stock that makes it into Top Ten is a market leader. Period.
So that’s it for my series of stocks that share growth and value characteristics. I think that understanding the difference between growth and value stocks is very important for individual investors. When you understand which stocks appeal to you, you will be well on your way to knowing your own investing personality. And that’s a good thing.
Chief Analyst, Cabot China & Emerging Markets Report
and Editor of Cabot Wealth Advisory