Growth investing appears to be making a comeback after several years ZTC


October 09, 1994|By New York Times News Service

Growth is struggling back.

Last summer's rally on Wall Street may have petered out, but at least one area is showing some energy.

Growth stocks, which have spent the past three years in the shadow of cyclical issues, are beginning to bounce back "like a beach ball held under water," says the growth fund manager Donald A. Yacktman.

And so are at least some growth-oriented mutual funds, though by no means all.

In fact, there are so many such funds -- 435 of the 979 diversified equity funds that have at least $30 million in assets, the largest group by far -- that the 5.48 percent return earned by growth funds last quarter still lagged the diversified equity average of 5.73 percent.

Also, most growth managers are momentum investors, and there's little momentum in price or volume so far. Rather, the growth managers who have been delivering the best returns this year are tightwads, looking for low prices as well as high growth.

A few of yesterday's bargains are already beginning to blossom, though, notably Microsoft, up 39 percent through the end of the third quarter this year amid hopes for big profits from new Windows 95 software.

As the market cycles turn, said John Markese, president of the American Association of Individual Investors, "investors want something that will punch through a stagnant market, and that's something that has tremendous growth."

Growth managers want double-digit growth on, and behind, the bottom line.

"We like to see growth in revenue and earnings, improving margins, expanding order backlogs," said Roger Honour, whose $300 million Montgomery Growth Fund has shot up more than 15 percent this year.

He also wants to be sure companies can sustain their growth and that they are relatively cheap.

"We want a company that is selling at both a discount to its internal growth, as well as a discount to its competitors."

Thus his year-old fund began with a big stake in Nokia. The Finnish manufacturer is the world's No. 2 supplier of cellular phones, after Motorola, and the second-largest supplier of wireless transmission equipment, after Sweden's L.M. Ericsson.

Yet a year ago the stock was trading at only 12 times forecast earnings, while its competitors were selling at 20 times earnings. Nokia's price has since doubled, Mr. Honour said, but the stock is still cheaper than that of its rivals.

The Yacktman Fund, up 9 percent this year, is heavy with Philip Morris. Investors had fled Philip Morris last year when it cut prices of Marlboro cigarettes, making it the year's worst-performing stock in the Dow Jones industrial average.

General Motors was the leader, Mr. Yacktman noted, adding: "Since 1957, GM stock has a little more than tripled. Philip Morris is up over 220 times. The difference is the business; Philip Morris has a much better business than GM does," specifically citing not its products but its high return on assets.

But Philip Morris is also a good example of what went wrong with growth in recent years. Nearly all the traditional growth favorites came under attack. Tobacco was spurned for health as well as price reasons. Drug companies were excoriated by the first lady.

Consumer products companies took heat from generic competitors. And last year's rapid economic growth provided a big boost for cyclical stocks in companies like GM, which see sales leap when the overall economy is strong.

Plenty of Mike Gordon's holdings are beginning to perk. His $2.7 billion Fidelity Blue Chip Growth Fund has risen more than 9 percent this year. Oracle Systems, Mr. Gordon's biggest position, has surged to around $43 a share recently from a low in April of $27.

With earnings in the latest quarter up 65 percent, Mr. Gordon said, Oracle "is less undervalued than it was, but I still think it presents a very attractive opportunity."

Indeed, some growth managers complain they are already having trouble finding good companies at affordable prices.

"It's difficult to find stocks that are down a lot except for a very good reason," said Jim Crabbe, president and co-founder of the Crabbe Huson Special Fund, which finished the first nine months up 11.3 percent.

His cash level is an unusually high 15 percent, and another 15 percent of assets are being used to short stocks he believes are overpriced, including Intel and Oracle.

"It's not because they're bad companies by any means," he said. "It's only because their growth rates are bound to slow down because they've grown so dramatically over the last few years."

While saying it's uncertain when growth investing will fully recover, Catherine Voss Sanders, associate editor of Morningstar Mutual Funds, is sure it ultimately will. "Large-cap growth has been out of favor for three years now," she said, "and at some point it's due for some strength."

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