Disclaimer: John Mooney owns GOOG in his Covestor Under-Capitalized Sectors model.
August 4, 2010: T. Rowe Price (the investor, not the firm he founded) isn’t mentioned much today, but in the mid-twentieth century he was well-known as one of the first modern proponents of growth stocks. He had clear criteria for desirable investments: a company should be one of the very strongest of its generation, increasing peak earnings per share with each business cycle, earning high returns on invested capital, avoiding intense competition, and making use of research and development spending to ensure the durability of its advantage. Classic Price stocks included Black and Decker (SWK), Merck (MRK), Honeywell (HON), and 3M (MMM). The fact that these are still familiar names tells you something about the durability of the kinds of companies Price was looking for.
To keep from missing the forest for the trees, I periodically ask myself a question that is similar to Price’s criteria: “what are the best growth companies of this generation?” My answers are Google (GOOG), Apple (AAPL), and Amazon (AMZN). As good companies as the first two are, my analysis suggests that Google (GOOG) is the best investment when taking valuation into account (as we always do). I believe its competitive position is much stronger than is generally believed and that, despite having a bad habit of squandering capital on things other than what it knows how to do best, Google is still a company it is difficult to imagine being irrelevant ten years from now. Its multiples exceed the market averages, but my conservative estimates of its future suggest it will justify them, and that now is as good a time as any to buy one of the companies that, in the year 2050, people will think you would have been crazy for not holding in 2010. So I’m holding it.
The market remains almost eerily positioned to work against my undercapitalization strategy, but I’ll continue to play the cards I’m dealt. I’ll also point out that, while the double-dip recession many are fretting about is certainly possible, it would be much more in line with past markets for the double-dip talk to be just another brick in the famous “wall of worry” climbed by every bull market. The most prominent modern double-dip I can think of (the early ’80s) was the result of government action more or less intended to cause a recession (the Reagan Recession was caused by the Volcker Fed’s rate hikes to beat inflation). To sink into a double-dip with today’s kind of worldwide accommodative consensus among central banks would be an extremely unusual event, and the fears of it happening seem about as likely to be a case of rear-view-mirror navigation as to be justified. Still, my job isn’t to predict events, it’s to prepare for them, and I expect my current positioning to leave me well-prepared regardless of what happens.
