This post was originally published on this site

The quest for open-ended stocks goes on and on. Nobody dares deal with the statistical experience. Namely, the average life of a growth stock normally lasts no longer than five years. The list is long on companies that couldn’t renew themselves. Not just in technology, but in retailing, pharmaceuticals, financials, whatever.

No more than 10% of growth stocks span more than a decade. Perhaps 5% hold primacy for 20 years. Who can say for sure that Apple AAPL , now a $2 trillion capitalization can renew itself, year-after-year? Microsoft MSFT has come close past decade, but I can’t get my hands around Amazon AMZN , a $1.5 trillion market pretty. Facebook’s advertising revenues comprise a major profit center. What happens during a prolonged recession? I’m all in, betting they’ll renew themselves.

I remember Edwin Land, Polaroid’s headman, proclaiming he expected everyone in the world would be seen shouldering his low-priced Swinger model. This is comparable today with Facebook’s goal of engaging the entire world on their internet platforms. (They’re halfway there, already.)

Recommended For You

As late as 1972, Polaroid remained a top 10 portfolio holding at Morgan Guaranty Trust. The stock sold at 90 times earnings then, a 400% premium over the S&P 500 Index. Consider, Facebook’s earnings rate forward 12 months is perceived at $10 a share. This puts Facebook at 25 times earnings, a fair valuation with the market at 20 times 2021s projection.

Facebook has reacted 15% from August’s high ground of $300. But, from the March low of $140, Facebook doubled. Financial journalists love to kick around Facebook and its maximum leader, Mark Zuckerberg, portrayed as a T-shirted rogue. And yet, he’s delivered the goods and overpromised nothing.

When I focused on Zuck’s R&D spend, as a percentage of revenues, I saw a heady 20% rate. Edwin Land spent a bunch of his R&D budget in the x-ray film sector, a huge error of commission. Let’s hope Facebook proves more productive, but they tell you nothing which I resent as a shareholder.

I see Alibaba BABA as a continuously profitable e-trade house far exceeding Amazon’s franchise. It’s 31% holding in Ant Group could be worth in five years nearly what Alibaba sells for currently, over $600 billion.

My simplistic-macro approach to growth stock investing is just buy the Nasdaq 100 NDAQ Index. Excepting overvalued periods like 2000, when operating profit margins for tech got schmeissed, the index normally outperforms the S&P 500. Certainly so this year.

Pie-chart investment houses like big banks, starting with JPMorgan Chase JPM , usually ignore Nasdaq 100 in their 60% allocation to the equity sector. Year-to-date, for example, Nasdaq is ahead over 25% compared with a gain of just 5% for the S&P 500. I don’t hear pundits addressing such wide-performance disparity or pounding the table that the S&P 500 can be a stodgy investment sector. Last time I looked, JPMorgan’s asset management performance trailed its index.

Historically, the search for open-ended growth stocks proved most dangerous to your health. A look-back to prior decades suggests not only do fundamentals waver, but awarding spry high-multipliers to specific stocks can damage your net worth.

Schlumberger SLB , for example, sold at 57 times earnings in 1972, Walt Disney DIS at 82 times, Xerox XRX at a 48 p/e ratio and Avon Products AVP at 65 times. The Xerox franchise was thought unassailable, Sears, Roebuck’s retailing primacy seemed assured. Most growthies then sold at two to three times the market multiplier of earnings.

Anything selling above two times the market is my cut-off point. I’ll berate myself for missing a great play and then subway home to reality. By 2014, over 40 years later, prime growth stocks like Google GOOGL , Microsoft and Apple sold at no premium to the market and went on to forge a great five-year performance showing. Currently, Microsoft, Apple and Facebook sell around 1.5 times the market’s earnings multiplier so I consider them still playable. Same goes for Facebook and Alibaba. I’m assuming I’ve got the fundamentals correct and my earnings expectations are met. If wrong I’ll be dead wrong, sorrowful, actually in tears.

Resting below prime growthies is a bunch of cyclical-growth properties with great franchises. FedEx FDX , for example, plays off Amazon’s package-growth trajectory. There’s T-Mobile’s franchise in telecommunications connectivity. I’m not ready as yet for a serious entry point into financials until I see the probability of a rising curve for net interest margins on loans. But, I just picked off Citigroup C after the Trump news broke.

I’m naked on basic industrials as already discounting post-Covid-19 recovery. I’m not against viciously-cyclical materials plays like Halliburton HAL and Freeport-McMoRan FCX but they’ve already doubled off their lows. No courage, no belief in ragamuffins like General Electric GE , Macy’s M , U.S. Steel, Alcoa AA and Ford Motor F , yesteryear’s plays.

There’s a bunch of stocks in the $15 to $30 range with leveraged possibilities. My list covers Dish, Enterprise Products Partners EPD and Williams. Prime industrials and rails I find too expensive, already discounting full recovery. I’m prepared to miss Caterpillar, Dow, Deere, Union Pacific UNP , General Motors GM , Honeywell and DuPont. Traditional nondurables names like Coca-Cola KO and Procter & Gamble PG leave me cold. No courage or taste for airlines and leveraged oils like Occidental Petroleum OXY . Big Board stocks starting with Amazon jitterbug intraday easily 3% to 5%. Day traders never experience what they expect to see.

Any wonder that a handful of stocks comprise 25% of the market’s total valuation? Historic icons like Polaroid, Xerox and Sears, Roebuck failed to renew themselves and deserved violent comeuppances. Tesla TSLA exists and thrives because traditional auto makers like Ford and General Motors failed to prioritize electric car development.

Ironically, Steve Jobs at Apple imitated Polaroid’s Edwin Land in his new product presentations – successfully. Apple’s R&D budget as a percentage of revenues is much lower than Microsoft’s and Facebook’s my major overweighted positions that don’t sell in the clouds.

If ever there was a time to take a stand between growth and value investing, it’s right now. My problem is most value stocks discount major earnings recovery next year. I’m not a believer that the Covid-19 vaccine is just around the corner.

My sole-major value sector play is in energy MLPs. So far, I’m a loser. But, Citigroup, selling at a 40% discount to book value sucked me in. Citigroup fits into my ragamuffin schema. Any good news puts such paper up 25%, tout de suite.

Sosnoff and/or his managed accounts own Apple, Microsoft, Amazon, Facebook, Alibaba, Walt Disney, FedEx, T-Mobile bonds, Citigroup, Halliburton, Freeport-McMoRan, Ford Motor bonds, Dish bonds, Enterprise Products Partners and Williams.

msosnoff@gmail.com