A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Finding Long-Term Growth Beyond Value
01/31/2013 11:26 am EST
The difference between value investing and growth investing is that the latter is about finding companies that will continue to grow and make money regardless of their valuation, says Stephen Grant of Value Line Premier Growth Fund.
Gregg Early: We’re here with Stephen Grant, fund manager of the Value Line Premier Growth Fund (VALSX). Stephen, I wanted to ask you: in this kind of environment, how do you go about looking for growth? Where do you find the value?
Stephen Grant: Well, the Value Line Premier Growth Fund has been around since 1956, and we certainly have seen all kinds of markets over the years. I personally have been managing it for close to 20 years.
Our main philosophy is that in order to find today’s winners, you want to look at what stocks have done well in the past ten years or so. We invest in proven winners, meaning stocks that have already shown consistent growth in both the stock price and the earnings over the past ten years or so.
Gregg Early: So these are long–term winners. They’re not the up and comers, as it were. You’re really looking at companies that have historical track records.
Stephen Grant: Yes, but we don’t invest so much. We have found that the sweet spot is the mid–cap stocks. These are funds that have already shown that they have a strong product line with a great management teams that have already done well consistently over the past decade, and yet they're small enough that they still have plenty of room to grow.
Gregg Early: I’ve heard from other managers that this seems to be an especially good kind of market for mid–caps as well, because they have more leverage than some of the larger–cap companies, and yet they have a little bit more safety than some of the small–cap companies in this kind of market.
Stephen Grant: Yes, I think that’s very true. These companies that we’re talking about have proprietary lines of products and services that allow them to have some control over their own destiny.
Gregg Early: They’re a bit more focused than some of the more diversified large caps and some of the one–trick ponies that are the small–caps as well, right?
Stephen Grant: That’s very true, and these firms have found their own niche in the market where they can continue to grow and competition is going to have a hard time making inroads into their products.
Gregg Early: They also tend to have better…well, the management teams are a little bit more sophisticated than the small–caps, where you might have some guy who invented something that’s still the CEO even though he’s not used to managing a company, much less a publicly traded one. He’s learning through experience, as opposed to some of the mid–cap managers who know where to play, that have been around, that understand where to fight to run a billion–dollar company and aren’t overwhelmed by it. They started as businesspeople, not as engineers or software guys.
Stephen Grant: That’s very true. These are team that have proven over the past ten years that they can do well. These are companies that have the right kind of teams working under them. The word I was trying to find was culture—that they really developed a culture within their company of winning and doing well.
Gregg Early: Do these companies tend to coalesce at this point in one or two sectors, or are you finding them fairly evenly dispersed throughout the marketplace?
Stephen Grant: Well, in general these are going to be growth companies, so the kind of stocks that we invest in are more growth stocks as opposed to value stocks. So, we’re going to tend to be overweighted in growth sectors like retail, certain industrial sectors, and so on. We’re going to be underweighted in things like financials, utilities, energy.
Gregg Early: Where you might be finding the value, but not necessarily the growth dynamic at this point.
Stephen Grant: We’re certainly a growth shop. We’re just trying to find that steady growth. Value to us is not so important. We have found that it pays off to pay up for the right firms, to pay for quality.
Gregg Early: Sure, do you have a couple examples of specific stocks?
Stephen Grant: Yes, sure, like Rollins (ROL). They’re in the pest control business. They own some good brand names like Orkin. It’s still a small–cap firm, but if you look at the stock chart, you’ll see it’s been just a steady upward march for more than ten years now.
This is the kind of high quality company that can do well in both down economies and up economies. That’s why our fund has lower risk than funds in the peer group on average, because we invest in high–quality firms that can do well in all kinds of environments.
Gregg Early: Do you have another example?
Stephen Grant: Yeah, sure, like a similar small to mid–cap firm is Flowers Industries (FLO), which is in the bakery business. Once again, they’re showing very steady growth for more than ten years.
They’re now in the process of probably taking over some of the business of the Hostess Bakeries, and this is going to be a way for them to add value to the firm quite efficiently and continue their good growth. They’ve grown through both accusations and internal growth.
Gregg Early: It sounds like you have growth that’s good in up and down markets…and it’s not the value of the stock, but the sheer fact that these are valuable companies regardless of market conditions.
Stephen Grant: Yeah, that’s true. Where we tend to outperform our peers is in down markets. In up markets like we’re seeing now, we pretty much can keep pace with our peers, sometimes even do a bit better.
But where we really earn our money is in down markets. We hold up very well, and I think that’s the kind of thing that investors are looking for these days. As a result of that combination, the fund has outperformed the S&P 500 for all time periods, meaning one year, three years, five years, ten years and 15 years.
Gregg Early: Wow, impressive.
Stephen Grant: Importantly, we’ve done it by taking less risk than the average fund in our peer group. So, that’s definitely the kind of combination that investors are seeking.
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