Investing in Growth Companies. Mutual Funds Manager Guide to Profitable Investment. Invest in Companies that turn an innovative idea into a consistent profit generating business.

July 15, 2009 by kutenk
Filed under: Investment 

Investing in Growth Companies


1.    Never invest in the stock market; invest in individual businesses.
The benefits of focusing on the strength and promise of individual companies outweigh the effects of more difficult to predict broad factors such as interest rates, foreign currency values and general market trends. For more than 26 years, we have capitalized on the historic relationship between earnings performance and stock prices by isolating rapidly growing companies that sell for reasonable multiples of forward earnings.




2.    Buy earnings, not dreams.
Three things ultimately determine a company’s value: the first is earnings, the second is earnings and the third is earnings. Sure, other factors drive stock prices, but our strategy is committed to the earnings power of individual companies. We require three years of earnings history and three years in after-tax income before a stock crosses our researchers’ radar screens, keeping us out of short-lived trends like the recent dot-com debacle.

3.    Prefer modest P/E ratios over high P/E ratios.
We typically avoid over-researched, big-name, highly visible, high-P/E companies – the Microsofts, WalMarts and Home Depots of the world. If a shoe maker grows earnings 40 percent a year in a mature industry and sells at 10 times estimates, we’d find it much more exciting than an optical networking company that grows earnings 30 percent with a forward P/E of 50.

4.    ‘Pigs at the Trough’.
Replace good ideas with great ones. Like a pig that has eaten its fill is displaced by a hungrier pig at the barnyard trough, potential holdings must earn their way into the portfolio by having more upside potential than an existing holding. Our system of forced displacement allows us to nimbly maneuver toward companies with earnings strength despite broad changes that often catch other investors off guard.

5.    Don’t buy ‘market leaders’.
Find a #7 company in an industry headed for the # 3 spot because its recognition increases and its P/E expands. There’s more money to be made in finding tomorrow’s winners than in chasing yesterday’s.
We were early buyers in Cisco in 1990, one year after it went public, and the second largest holder of Dell years back. When they become household names with hefty prices relative to their earnings growth, we sold for lesser knowns with substantially more earnings upside per dollar invested.




6.    Don’t subscribe to the ‘I Love Lucy’ investment strategy.
Lucy believed the 10 cents a jar she and Ethel lost on their kitchen-based jam business could be ‘made up on volume.’ The strategy didn’t work for them, it didn’t work for the dotcoms and it will never work.
In 1998 and 1999, analysts hyped internet start-ups preaching ‘earnings don’t matter’ in the ‘new economy,’ focusing instead on price-to-sales ratios and website ‘hits’. Only companies that turn an innovative idea into a consistent profit-generating business deserve our attention.

7.    Don’t let the tax tail wag the investment dog.
Gains can and do evaporate. We operate under the premise that shareholders would rather make money than risk losing it in order to avoid a tax bill. Brandywine’s taxable shareholders made over $3 billion dollars in 1999 and 2000. Sales of Nortel, Nokia and other technology stocks near all-time highs on signs of deteriorating fundamentals saved $1 billion.

8.    Indexing makes no sense.
Investing in a pre-constructed basket of stocks, including the sick and outrageously over-valued ones, has never made sense to us. There are just too many variables. After a tremendous run-up in the ‘Nifty-Fifty,’ the S&P 500 peaked in 1973, failing to reach that level again for nine years. In the 24 months ended March 31, the S&P 500 as a proxy for index investors fell 8 percent while Brandywine grew 40 percent. The challenge is to uncover fundamental developments, both good and bad, before others pick up on them.

9.    Embrace entrepreneurship through teamwork.
Make the ultimate measure of success how well clients and shareholders perform. The Friess research team structure is unique. Their seven research teams are not in competition. They cooperate, sharing information from each contact they make in a real-time database and alerting others to potential opportunities. Team decisions are surprisingly selfless. There have been years when the largest bonus did not go to the person with the best raw performance, but to someone who helped other teammates excel.

10.    Accentuate the positive.
Anyone who doesn’t admit to making mistakes in the investment business hasn’t been in it long enough. Foster is motivated by Philippians 4:8, which says, ‘Whatever is true, whatever is noble, whatever is right, whatever is pure, whatever is lovely, whatever is admirable – if anything is excellent or praiseworthy – dwell on such things.’ We refer to mistakes as ‘adjustment opportunities,’ or AOs, since each AO provides insight into how we might address the situation better next time.

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