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Growth investors obsess over the future. They talk constantly of profit predictions, and they plot and chart company revenues from 12 months to three years in advance.
But that’s just half the picture, says William Young, president of Buford, Dickson, Harper & Sparrow Inc., a $50 million institutional money management firm that invests pension funds for Enterprise Rental Car, Washington University, and the St. Louis Board of Education. Young, a pro who has been in the business for almost 30 years, says growth managers need to focus on the past as well.
He says Wall Street tends to value growth stocks on “comparisons,” or just how this year’s profits look next to last year’s numbers. Since corporate earnings slumped in 2001, many companies are bound to find that their results in 2002 will look strong against figures of a year earlier. “There’s no other way to say it,” says Young. “Good companies are bound to turn in very strong comparisons beginning this summer, and that’s bound to get Wall Street to sit up and notice some of our holdings.”
Young describes his firm’s stock-picking technique as “momentum” investing. Since its inception in 1996 to the end of the first quarter of 2002, Buford Dickson has logged an average annual total return of 18.7% compared to 12.2% for the Standard & Poor’s 500 index as of March 30, 2002.
When picking stocks, Young says the firm starts with companies that have a market capitalization of $5 billion or greater, with an aim of whittling that group of 10,000 names down to a portfolio of roughly 20 positions. Candidates must show three to five years’ worth of good earnings growth. Also, Buford, Dickson likes to latch onto companies that can outdo Wall Street earnings predictions. Earnings shortfalls are a telltale sign as well. “Whenever we find that a company we own can’t keep up with the Street’s view, we’re probably going to sell their shares,” he says.
Young leads his Private Screening selections off with the sportswear maker Nike (NYSE: NKE). “They dominate their market and have some of the strongest branding in the business,” he says. Young is particularly impressed with what he calls the “Tiger Woods effect” and says the golfer’s many appearances in televised matches help promote the Nike “swoosh” to billions of customers. He says a second pick, Kraft Foods (NYSE: KFT), has an equally deft marketing touch. “With names like Nabisco, Maxwell House, and Oscar Mayer, they’re ubiquitous, and management is making some major inroads in international markets as well.”
Young believes Apple Computer’s (Nasdaq: AAPL) new wares make a compelling case for the Silicon Valley mainstay. He says the company enjoys brand loyalty like few others in the business. Another pick, AutoZone (NYSE: AZO), gains points because it has won over a large share of the car maintenance market, says Young. Finally, United Technologies (NYSE: UTX) qualifies as a no-brainer in Young’s opinion. “All you have to do is remember 9-11,” he says. “With the big increase in defense spending, a