Rapid Growers In Short Supply
Our exposure to equities hinges mostly on two things: the market's primary trend and the opportunities available in individual stocks.
A close in the Dow Industrials above their Dec. 31 all-time high of 16,576.66 would represent an unambiguous reconfirmation of the bullish primary trend, as the Dow Transports recently closed above their January all-time high of 7,569.89. Without new highs in the Dow Industrials, a breakdown below the respective Feb. 3 lows of 15,372.80 and 7,053.75 would represent a textbook bear-market signal under the Dow Theory.
Assessing the opportunities available in individual stocks is not so clear-cut. As a rough gauge, we looked at the number of companies in the large-company S&P 500 Index delivering growth. As shown in the tables below, the picture is mixed:
• The number of S&P 500 members delivering healthy per-share profit growth is only slightly below long-term norms. For example, 250 members delivered at least 10% growth in their most recent quarter — versus the norm of 262 since 1994. Today's total of 250 is higher than 33% of the month-ends since 1994.
• Big companies delivering modest sales growth are widely available, but relatively few are posting double-digit sales growth. As a result, companies with robust profit and sales momentum are relatively scarce. Still, 181 members of the S&P 500 delivered at least 5% growth in per-share profits and sales in their most recent quarter, only modestly below the norm of 200.
• Among stocks with moderate valuations, robust growers are truly scarce. Some 265 S&P 500 stocks have trailing P/E ratios below 20, only slightly below the norm of 274. But only 28 stocks have P/Es below 20 and double-digit sales and profit momentum — well below the norm of 70.
Today's inflation rate is low, so comparisons based on inflation-adjusted sales growth would look better. But there is no denying that rapid sales growers are in short supply — and that the few that do exist mostly trade at rich P/Es.
Rather than pay up for rapid growers trading at exorbitant valuations, investors should take what the market is giving. Some of today's best values can be found among companies with moderate but sustainable growth rates.
For example, the 29 stocks on our Buy List trade at an average trailing P/E of 18. Yet these 29 companies averaged per-share-profit growth of nearly 20% in their most recent quarter, with 23 posting at least 5% growth. Average sales growth was 9%, with 25 posting positive growth.
While finding attractively valued growers has become more difficult, we are still finding enough to build a diversified portfolio. Our buy lists have 94% to 98% in stocks.