Download Growth Investing: Defensive for Now, But Focused on Long

Growth Investing: Defensive for Now, But Focused on LongTermMarketLeaders
June3,20145:00PM
ByF.T homasO'Halloran
50 1Views
Themostinnovativecompaniesstillappeartobewellpositionedtobemarketleadersfortherestof
thedecade.
It takes a strong stomach and a lot of humility to invest in growth
stocks. The key is anticipating when momentum has shif ted or is
about to turn. That's when high-f liers can go f rom price spikes to
"f allingknives."Youdon'twanttocatchthemonthewaydown.
Take biotech stocks. Several of these appreciated by well over 100% over the past 18
months,withaf ewmakingparabolicmovesrecently.Assoonasthesestocksbegantopping
orcrackinglatelastyearandearlythisyear,wequicklytookdownpositionsizes,andina
numberof casesexitedpositions.Aviciouscorrectionensuedthereaf ter.
Fortunately, we adopted a more def ensive investment strategy in early 2014 comprised of
cyclicalgrowthandstablegrowthstocks.Cyclicalgrowthstockstypicallycanbef oundinthe
consumer and industrial sectors. Stable growth stocks tend to produce relatively steady,
predictable earnings growth, even in dif f icult economic conditions, although, due to market
volatility,thesestocksmaynotperf orminasimilarmannerinthef uture.
While the current growth correction may run several months more, keep in mind that
innovationcontinuesatarapidpace.Themostinnovativecompaniestendtobegrowingat
adramaticallyf asterratethanthegeneraleconomy,andtheref orecouldbewellpositioned
tobemarketleadersf ortherestof thedecade.
The key is to f orecast the growth accurately. "Fully valued" companies of ten appreciate
substantially if their growth potential is underestimated by the market. Growth stocks that
appearattractivelyvaluedmayf allhardif theirgrowthdisappoints.Whenthishappens,itis
of ten because of a change in the business that will likely endure. The momentum of these
adversedevelopmentsisof tenunderestimated.
Howdoweknowwhentocutbackoncertainholdings?Wegenerallysellortrimsecuritiesif
the security no longer meets our investment criteria, including: 1) a negative directional
developmentatthecompanylevel,whichcouldincludeanadversechangeinthecompany’s
businessmodel,management,industryconditions,orcompetitiveposition;and2)achange
in the growth attributes of the company (whether this is a change in the growth rate, lof ty
expectations,orexcessivevaluation)thatleadsustobelievethatgrowthwillnolongerdrive
stockoutperf ormance.
Willinnovationcontinuetodrivegrowthstocksthisyear?Telluswhatyouthink.
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F.ThomasO’HalloranisaLordAbbettPartnerandPortfolioManager.
Thevalueof investmentsinequitysecuritieswillf luctuateinresponsetogeneraleconomic
conditions and to changes in the prospects of particular companies and/or sectors in the
economy.Whilegrowthstocksaresubjecttothedailyupsanddownsof thestockmarket,
theirlong-termpotentialaswellastheirvolatilitycanbesubstantial.
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