Do Not Buy Growth Stocks - eResearch

[Pages:5]Third Party Research

May 2, 2015

Do Not Buy Growth Stocks

eResearch Corporation is pleased to provide an article from Zacks Investment Research, featuring Steve Reitmeister, Executive Vice-President.

In this article, Steve Reitmeister outlines the poor performance his firm has identified for growth stocks.

__________________________________________________________________

Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

As a leading investment research firm, Zacks Investment Research focuses on stock research, analysis, and recommendations.

Founded in 1977, Zacks Investment Research is dedicated to providing professional investors with the financial data and analysis needed to make better speculative decisions for themselves and their clients.

Zacks Investment Research is used by thousands of analysts at well over 200 brokerages to give clients reliable investment information. Zacks has also expanded its online presence and has begun offering more products designed for individual investors.

You can learn about Zacks Investment Research at its website:

__________________________________________________________________

eResearch was established in 2000 as Canada's first equity issuer-sponsored research organization. Our various research packages allow corporate management to choose the form of research coverage that best meets their company's needs. Investors benefit by having written research on a variety of under-covered companies.

Bob Weir, CFA Director of Research

Note: All of the comments, views, opinions, suggestions, recommendations, etc., contained in this Article, and which is distributed by eResearch Corporation, are strictly those of the Author and do not necessarily reflect those of eResearch Corporation.

eResearch Corporation 78 Cameron Crescent, Suite 202 Toronto, Ontario M4G 2A3

eresearch.ca

Do Not Buy Growth Stocks

by Steve Reitmeister, Executive Vice-President, Zacks Investment Research

May 1, 2015

When you ask most investors for their favorite stocks, you'll rarely hear them share blue chip names like Johnson & Johnson, Kraft Foods or WalMart. Instead they will tell you about some amazing growth stock that will be the next Google, Microsoft or Apple.

These investors believe that by simply buying stocks with the greatest earnings growth potential that they will make money. Sadly our research clearly shows this not be true... not even close.

In this article I will dispel the myth about investing in growth stocks just for growth's sake. Instead I am going to shine the light on a path that has more consistently paved the way to profits.

Research Says...

I know that many of you are still shaking your heads in disbelief. Certainly I must be joking, right?

Unfortunately our research details, without a doubt, the vast under-performance of most growth stocks over the past decade. Here are the results:

eResearch Corporation

~ 2 ~

eresearch.ca

*The study had a 4-week rebalancing of stocks between 4/2005 and 3/2015

Stocks with the lowest projected growth rates actually generated the highest return of +9.0% per year. Each level of additional earnings growth came with decreasing levels of profits for investors. As we look at the most aggressive stocks, with 30%+ expected earnings growth, we find an embarrassing loss of 1.2%. This begs an obvious question:

Why Don't Most Growth Stocks Pan Out?

The early investors in growth stocks usually do quite well. They take the early risk when almost no one has heard of the company. As the company bangs out earnings surprise after earnings surprise it gains more investor attention and a much higher share price.

However, at some point the company will be "priced for perfection". Meaning that the PE gets too inflated as people are so sure that the good times will just keep rolling (think of a mini version of the late 1990s tech bubble).

Unfortunately the exceptional growth rarely holds up over time. At some point, as the company tries to expand so rapidly, it will stumble. Even if that just means going from a 40% growth rate to a 30% growth rate. On the surface, 30% still sounds great...but not to the investors who expected 40%+ and paid up for that premium. So naturally the stock will tank. And tank fast.

I'm sure you've had a few of these stocks in your portfolio over the years. So I don't have to remind you how quickly the losses add up. That, in a nutshell, is the danger of investing in growth stocks.

So What Does Work?

Certainly you could look at the stats above and conclude that stocks with lower projected growth rates generally outperform. That is true. But we can do a heck of a lot better than that.

The key is to find stocks that exceed expectations no matter the growth rate. Meaning that a stock that is expected to grow profits by 5% and ends up growing by 7%, will do very well. Ditto for a stock expected to grow 30% that ends up at 35% actual earnings growth.

eResearch Corporation

~ 3 ~

eresearch.ca

I know on the surface it sounds like you need a crystal ball to predict which companies will beat their earnings projections. Gladly it's actually much easier than you think because Len Zacks has done the hard work for you.

In the mid-1970s Len Zacks realized that stocks that had big earnings surprises continued to outperform the market over the next several months. This is what academics call the Post Earnings Announcement Drift...(yes, I know it sounds more like a medical problem than a means in which to invest in stocks ;-).

But Len went a step further. He wanted to find indicators that would show him stocks more likely to have positive earnings surprises BEFORE they happened. If you could do that, then the odds of success were firmly stacked in your favor.

For the next several years Len worked feverishly to discover these indicators. Gladly for all of us he did find 4 leading indicators of future earnings surprises. Three of these measures are ways of looking at brokerage analyst earnings estimate revisions. The last being an analysis of past earnings surprises.

Each factor is potent by itself. Blending them together creates an almost unfair advantage for investors...that advantage is now called the Zacks Rank stock rating system.

Our Zacks #1 Ranked strong buy stocks have produced an average annual return of +26% going back to 1988. These results have been examined and attested to by an independent accounting firm.

BW: The remainder of the article discusses the merits of Zacks #1 Ranked Stocks and the Zacks Ultimate Trader service. You can read the entire report at its source:

Best,

Steve Reitmeister ( aka Reity...pronounced "Righty" ) Executive Vice President Zacks Investment Research

eResearch Corporation

~ 4 ~

eresearch.ca

Steve's Featured Commentaries on

Beyond : 3 Other Cloud Stocks to Watch >>

Auto Stock Roundup >>

About Zacks Ultimate Trial >>

Best Aggressive Growth Funds from Q1 >>

About Steve Reitmeister

Steve Reitmeister joined Zacks Investment Research in 1999 to become the Managing Editor of the Zacks Elite newsletter. Ten years later, the Hulbert Digest noted the Zacks Elite had the best 10-year stock picking performance 12-1999 to 11-2009 of any newsletter they followed. Since then, he has worn many hats for the firm including his current position as Executive VP in charge of and its subscription services for individual investors.

His main focus is educating people on how to invest more successfully. This is primarily done through the 2 portfolios he currently runs for Zacks customers: Reitmeister Trading Alert and Zacks Confidential. Plus, you will find regular commentary from him on leading investment websites like , Yahoo Finance, SeekingAlpha, CNNMoney, and MarketWatch.

Steve has an MBA from DePaul University and B.A. in Economics from University of Wisconsin.

To contact us by mail: Zacks Investment Research, Inc. 10 S. Riverside Plaza, Suite 1600 Chicago, IL 60606

Disclosure

This free resource is being sent by to our subscribers. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. disclaimer

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable.

All information is current as of the date of herein and is subject to change without notice.

Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, brokerage, market making or asset management activities of any securities. Visit performance for information about the performance numbers displayed in this press release.

eResearch Corporation

~ 5 ~

eresearch.ca

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download