Investors had a love affair with growth stocks in the '80s. Then the stocks became too pricey, and investors cast them aside. Now the price is right again, and that old passion is rekindling. Growth stocks are issues with the potential to show bigger earnings increases than the average stock. Typically, growth stocks' price-earnings ratios are high, but investors believe their prospects justify the numbers.
Today isn't typical. "The P-Es of many large-cap growth stocks are basically on a par with the market," notes Chuck Zender, a partner at Leuthold and Anderson, a money-management firm in Minneapolis. "This is an uncommon development, and it accounts for the renewed interest in growth stocks.
"The time also seems right for growth stocks," Zender adds. "We're in the 45th month of this economic expansion, and the average recovery has lasted about 40 months. Soon, money managers will be looking primarily for stocks whose earnings are going to go up regardless of what the economy is doing."
If growth stocks are poised for a rally, which offer the best opportunities? To get answers, we talked with four managers of mutual funds that emphasize growth. Each of the four has managed portfolios through several economic cycles and is familiar with the long-term records of growth stocks.
And for those who'd rather invest in growth funds than growth stocks, a table of the leaders is on page 85. (Table omitted)
HIGH TECH AND HIGH HOPE
Ronald Ognar, portfolio manager of the Strong Growth Fund, is focusing much of his attention on large technology and telecommunications companies--Microsoft, Motorola, and General Instrument.
"Each company has classic growth characteristics--superior management, increasing market share, and long-term earnings growth above the industry norm," says Ognar, whose fund ranked among last year's top performers with a 17 percent increase in value through October. "Moreover, they have excellent incentive programs for top personnel."
Though Microsoft's profit margins have been nicked by high research and development costs, revenues remain strong. One reason: The company's latest versions of its Word word processor and Excel spreadsheet have sold well. A major new version of Windows is expected this year.
Favorable conditions worldwide in wireless communications and semiconductors should make Motorola a strong growth company.
Finally, earnings of General Instrument, a leading supplier of systems and equipment for cable and satellite television, should continue to rise along with higher volume in broadband communications and power semiconductors.
Ognar also has some low-tech favorites. One is Caterpillar, the heavy-equipment manufacturer. "By keeping prices under control, the company has made great strides against its Japanese competitors," he says. "Strong economic growth in Latin America and Southeast Asia should continue to expand Caterpillar's foreign business."
MIDSIZE AND GROWING
Robert W. Benson, manager of Pioneer Three in Boston, has seen his fund's value increase by almost 13 percent annually over the last three years. Now he's finding further investment potential among midsized companies, such as Consolidated Stores, Modine Manufacturing, and Integrated Health Services.
"All three have strong unit growth, the flexibility to raise prices without losing sales, and a commitment to keeping costs under control," says Benson.
Consolidated Stores has 761 locations that sell a wide range of discounted merchandise, from housewares and electronics to clothes and auto supplies. The stock's P-E ratio of 18 is close to the market average, and its projected earnings growth rate is …