We continue to see worrisome commentary about market valuations, with hand-wringing about whether the stock market is overvalued or might be in a bubble… and it can get a bit draining, frankly. Caution is important, diversification is important, but worrying does us little good. Yes, investors are paying a steep price for anticipated growth in many stocks… yes, the stock market is at the top end of “normal” valuations over the past several decades, and yes, short-term interest rates near zero obviously have a lot to do with the stock market’s success… when money’s cheap, it’s easier to use it to gamble.
But really, none of us is going to be able to forecast when things might turn. Yes, there will probably be a bear market at some point, and there are always bull and bear markets in particular sectors or niches of the stock market. But one thing that almost always helps to fuel the top stocks is that growth makes investors happy. Ever since Peter Lynch told us all that we could invest for ourselves and find fast-growing ideas by looking around our communities and watching what we buy, investors have been willing to pay sometimes steep prices for companies that are proving they can grow revenues and earnings (yes, it’s OK to say “sales” instead of “revenues,” or “profits” instead of “earnings” — but that will make you feel less important, and your pinstripe suit might be confiscated).
So even with Peter Lynch’s “Growth at a Reasonable Price” perhaps getting a little harder to find (he particularly fancied what he termed the “PEG ratio” — price divided by earnings divided by expected five year growth rate, positing that growing faster than the PE ratio, a PEG ratio of less than one, is a possible sign of a bargain growth stock — he thought of a PEG of 1 as “fair”), we still all hope to buy that next company that revolutionizes something, or builds their business better than competitors, and creates a true colossus over time on the back of an exceptional and sustainable growth rate. So where do we find these stocks?
Well, one place to look is among the growth-lovers — the folks who make their living finding and buying the stocks that the rest of us typically think of as being “too expensive,” at least at first glance. David Gardner at the Motley Fool has made his reputation at one end of that spectrum, being the guy who buys and holds forever the incredible, world-changing companies that make 1,000% gains over a decade or more (Netflix, Priceline.com, Disney/Pixar/Marvel, etc.), and part of his “rule breakers” criteria for an investment is that Wall Street and those running the “conventional wisdom” business must think it’s already “too expensive.” David’s ideas rely on stories, of his perception about the future potential of a business because it’s shaking things up and doing something different that’s going to be far more powerful than the Street expects.
At the other end of the growth-seekers is the quantitative and momentum group — those who don’t look for stories or forecast the future, but just say, “this company is growing fast and faster and investors are loving it more and more, and that’s