SBaus (41.67)

Value AND Growth Investing

May 28, 2008 – Comments (2) | RELATED TICKERS: LXU , CAE , VSEC

I have always considered myself to be a value investing when in fact I am probably more a growth investor that just recently started to look more for value.

That being said, I am always puzzled when I hear people talking about value investing versus growth investing.  Is there any reason why you can not be both a value and a growth investor.  There are no laws of physics that says a company with solid growth can not also be cheap.

It would be as if someone says they like to date blondes but also like to date women with short hair...  Here is an idea, why not date a blonde with short hair?  I am an idea guy Chuck.

So, I look for growth stock that are cheap.  They are easy enough to find, just use the stock screener tool right here on CAPS, put in a max value of 10 in the PE column, a min value of 25 in the EPS growth rate and you will get lots and lots of results.  I tend to also add some minimum insider ownership % and also a minimum return on equity because these are good things and it limits the list to something managable.  And of course I limit my picks to just 4 and 5 star stocks.

On thing to note, when I say cheap, I want a PE that is less than the growth rate and obviously the stocks that show from the screener will have that but, I also want stocks where the current PE is on the lower end of both the companies historical PE and the industries historical PE.  So if a stock shows up with a PE of 8, that alone does not say to me cheap.  If the PE high for the last 5 years is 30 and the PE low for the last 5 years is 7, ok, getting warmer.  Next do the same comparison between the current PE and the industry PE high and low for the last 5 years.  Is the current PE on the low end of the industries PE for the last 5 years.  If so, then we are talking cheap.

A couple of example of stocks that show would be LXU, which I do own, and CAE, which I am planning on purchasing.  Make a note though that you should probably tweak the criteria somewhat.  In my above example, a max PE of 10 would exclude a stock such as VSEC, which I do not currently own.  Now VSEC has a PE of 10.8 and a growth rate of 42.20.  GREAT!  It also has a PE that while not historically super low for the company, it is right near bottom for the industry.  So to me, VSEC would be classified as a cheap growth stock.

So why do I do this, what is my underlying theory?  Like eveyone else, I am looking for stocks that go up in price over time, ideally up a lot in a short period of time.  So if I find a cheap growth stock, if the growth continues but it still remains cheap, i.e. the PE ratio stays the same, the price appreciation should match the growth rate and if that growth rate is say 30%, great.  My $10 stock is now $13.  But... if in addition to the growth rate staying the same, the stock becomes less cheap, say it goes from a PE of 10 to a PE of 12, then my $10 stock is now a $15.60 stock.  I get an additional bang for my buck.... literally.

So, by looking for both value and growth, I can potentially get price appreciation from two sources that if combined, can result in much higher rates or return.

That is my story and I am sticking to it.