Growth stocks poised for market comeback, Price says

But it tells shareholders that meaning of `growth' is constantly changing

July 17, 2005|By Chet Currier | Chet Currier,BLOOMBERG NEWS

Growth-stock investing never dies, it just relocates.

That point of view permeates recent commentaries from T. Rowe Price Group Inc.

Having lagged value stocks since the end of the 1990s, large growth stocks are "poised to regain market leadership," the Baltimore investment firm argued in the latest edition of its quarterly T. Rowe Price Report to shareholders. The trick lies in choosing what to deem a growth stock.

The newsletter said the glitter has dimmed at many former growth favorites in numerous industries, including pharmaceuticals, technology, food, beverages and household products.

"A lot of the companies today operate in ex-growth industries," says Robert Sharps, manager at Price's Large-Cap Institutional Growth Fund. "You have to be selective and look for companies that haven't already consolidated their industry and don't already have massive share of their market and very high margins. That might include sectors like biotechnology, HMOs, or Internet-oriented companies - stocks like eBay, Yahoo!, Gilead Sciences and UnitedHealth Group."

Where else? The letter mentioned energy and other commodity producers, propelled by "dramatic change in demand from China and India that seems durable."

It may sound obvious that tomorrow's growth stocks are likely to be different from yesterday's. That point often gets lost, though, in static analyses of growth versus value investing.

This discussion also sheds light on a basic issue in investing - the challenge of trying to discern the next emerging trend in the markets.

Recent history shows that the answer to this riddle is often hidden in plain sight. Key themes such as technology in the 1990s and China in the 2000s spend years in gestation, right before our eyes.

Computer technology was a hot-and-cold market story all through the 1980s before becoming a mania in the '90s. As for the new emerging markets, I can recall meeting a fund manager in the early 1990s who showed me a slip of paper he carried in his wallet. It read: "Don't sell China for 10 years."

As the managers at Price suggest, it's never enough to decide in some abstract way that you want to be a "growth" investor. Then you have to ask a more demanding question - how growth investing might have changed since last you looked.

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