By Paul Goodwin, Chief Analyst, Cabot China & Emerging Markets Report
From Cabot Wealth Advisory 11/2/13 Sign up for free Cabot Wealth Advisory
This series about Growth/Value stocks has featured a group of companies whose fundamentals make them attractive to value investors, but only if the price is right.
With Northrop Grumman (NOC), we come to a stock that illustrates a point of real conflict between value and growth investors.
When Roy Ward, the number-crunching power behind Cabot Benjamin Graham Value Investor, included Northrop Grumman in his October list of “275 Top Value Stocks,” NOC had already outrun the strict limits that the value discipline imposes for buying and selling.
Roy said that NOC would be a good buy at a Maximum Buy Price of 59.59. Given that the stock has been trading over 100 in the last couple of weeks, I’d have to say that yes, that would be a very good place to buy it.
Unfortunately, NOC hasn’t been trading under 60 since June 2012.
The fortunate investor who bought NOC at its value price of 59.59 would have waited until the stock reached its Minimum Sell Price of 90.69, which happened in July 2013.
While the stock was making that upmove, value investors would also have enjoyed the company’s quarterly dividend that paid an attractive 2.3% forward annual dividend yield.
But here’s where the story gets interesting for a growth investor. Northrop Grumman was first featured in the June 17, 2013 issue of Cabot Top Ten Trader. On that day, NOC closed at 84.
By the time NOC made its second appearance in Cabot Top Ten Trader (October 28, 2013), the stock had soared to 108, which is just about where it’s likely to close for the week. So, if a value investor had sold NOC when it tagged 90.69 in July, they would have missed out on a stock that ran from about 91 to 108, with no apparent limits on how high it might go.
I know that situations like this are what separates the value investors from the growth people. The essence of the value strategy is risk control, and it’s the accumulation of predictable gains through a widely diversified portfolio of undervalued stocks that gets the job done over time. For growth investors, a good story, sound fundamentals and a chart with some evidence of buyers stocking up on the stock is the ideal. And Northrop Grumman certainly fills that bill. Cabot always says that you can make money in any investing style if you follow the rules. And that’s why we offer investing advisories that span different strategies.