Classifications of Stocks (part A)
by
Charles Lamson
Growth Stocks
Once again, we step into the murky waters of classifications. Simply labeling a stock "growth" is not very helpful. How much growth? What kind of growth? Over what period of time?
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Of all the classifications we will look at, this is the hardest to pin down without some help from the experts. This help is free and readily available if you have access to the Intertnet. One of the best places to start is www.morningstar.com. This site has a tremendous amount of information and classifies individual stocks by their own system.
To help us get a handle on the whole growth issue, let us look at two companies that can be classified as "growth" companies. The first is the original Ma Bell, AT&T, which was reinventing itself as a major player in delivering Internet services in the 1990s.
In earlier posts, we noted that growth stocks usually do not pay dividends, yet here is a growth stock that does. What gives? This is another example of the slippery slope of classifications. Many people would put AT&T into the income category, a category that is often pictured as older, mature companies who are paying out most of their profits as dividends.
AT&T is certainly mature, but toward the end of 1999 this "old" stock gained over 20 percent in three weeks! Does that sound like a dinosaur to you?
AT&T has forged some key partnerships and made significant acquisitions to petition itself as a player in the future of Internet communications, as well as regular telecommunications services.
If you were to make an investment decision based on growth alone, Amazon.com would seem to be the better choice.
Yet, this is not the whole picture; it points out a danger when looking for ways to define stocks. One measure is hardly ever enough to get an accurate picture. If you had to invest your life savings into one of these companies, which would you pick?
At the turn of the millenium, Amazon.com seemed like a place your investment could grow in a hurry. At the time, AT&T had $162.8 billion in assets and had been a successful company for many decades, while five years earlier nobody ever heard of Amazon.com and it had assets of only $2.2 billion. Would that change your mind?
In his book, Alpha Teach Yourself Investing in 24 Hours, Ken Little chose these two examples because they fall on opposite ends of the growth spectrum.
Morningstar called Amazon.com a "speculative growth" stock, meaning it could continue its explosive growth or implode and disappear altogether. At the time, the company had never earned a dollar and there were no profits on the horizon.
Growth can be defined as growth in sales, profits, dividends, or a number of other criteria. Using sales, Amazon.com would clearly fall into the growth category. If you screened for companies showing growth in earnings, Amazon.com would not even be a blip, since it had no earnings at that time.
In later posts, we will look at ways to screen stocks that meet your investment needs (and help you define what your needs are) through a set of parameters. This process will help you compare apples and apples.
As different as AT&T and Amazon.com are, they both have at least one thing in common: potential. Amazon.com is a trailblaizer in online commerce. It has obviously experienced explosive sales growth, going from virtually nothing to $1.2 billion in sales in only a few years before, the turn of the millenium. In addition, by the end of September 1999, it had over 13 million customers. That is the potential fueling the tremendous investor interest in a company that is broke by most accounting standards.
AT&T, on the other hand, has a huge asset base and a tremendous position in the telecommunications market. Back then, bought a cable company, which gave it another entree to the consumer and business markets for high-speed access to the Internet. When combined with its traditional services, including wireless access, many investors felt they were in a commanding position to participate in the anticipated growth of high-speed Internet access.
On the other hand, Morningstar.com looked at AT&T a bit differently. The service uses a grading system that ranks each stock in the following areas:
These grading systems are another way to find comparisons of like stocks. It is also a way to quickly see where a stock may be strong or have some weakness. Morningstar.com arrives at these grades based on fairly detailed financial calculations that do not directly include potential. Let us see how the stocks do in a head-to-head grading using the Morningstar system:
As we have already surmised, these two stoocks are nothing alike, yet they both could be called growth stocks of some sort.
The lesson here is that you should not get tipped up over broad terms such as "growth" when considering stocks. If you want an objective determination, use one of the several systems available, such Morningstar.com. This will help you compare like stocks.
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