Value with Reasonable Growth

08/14/2014 6:00 am EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

Jon Markman turns the conventional wisdom of "growth at a reasonable price" on its head with his investment philosophy and shares what he looks for before buying stocks.

SPEAKER:  Hi, I’m here today with Jon Markman, founder of Markman Capital Insight, so we’re going to talk about stocks.  Jon, what stocks do you think people should be looking into right now for their investment portfolio?

JON:  Well you know, when it comes to large cap stocks, you always want to buy value.  We want to buy stocks that are trading at a discount to their intrinsic value, by which I mean a discount to their historic price to range, price to sale, price to book value, and a discount to their peers; earnings, PEs versus sales ratio and price to book ratio; okay?  One theory amongst growth investors is called growth at a reasonable price, or GARP.  I think that’s wrong, because I think that investors tend to overpay for growth.  You know, you always – as an individual and as an investor – you always have to look for growth, and you want the things that grow fastest, and you expect them to be valued the most.  The problem is that by the time stocks get to be fast growers, they usually tend to be overvalued, so I have a different approach, and that is I look for value with reasonable growth. 

SPEAKER:  Not growth with reasonable value.

JON:  That’s right.  Not growth at a reasonable price, but value; just a reasonable growth.

SPEAKER:  What types of stocks?  What types of areas are you looking at?

JON:  So, you know, stocks can be trading at all-time highs and still be considered values.  3M is a great example.  It’s trading at an all-time high right now, and it’s actually about 40% under value, and it has reasonable growth.  I mean, it’s not exceptional growth, but it’s a good five to seven percent which is all that a good company needs to be successful.

SPEAKER:  Do you have a technology stock, service letter also?

JON:  So on the one hand, you want to buy big cap stocks that are cheap.  On the other hand, I think that investors ought to be taking more risk and buying emerging technology stocks that have been crushed after coming public.

SPEAKER:  What type of stock; like give an example of one stock?

JON:  So, a great example recently is a company called TWOU.  It’s a company that provides software as a service to universities to allow them to provide four-year or graduate degrees to students for online.  It’s a fantastic business model.  TWOU signs up customers for 10 to 12-year contracts, and it gets a percentage of the student’s tuition over the four-year term.  They have to invest in the learning programs that they do, which is why they’re not making any money, but I think if you look forward going out three, five years, in two years it’s going to be a very successful company.

SPEAKER:  What do you think; you had mentioned something about Apple and Beats.  What do you think is going on with that transaction?

JON:  Well, you know, it’s a little hard to understand, because Beats Headphones are a fashion item, and as a fashion item, they’re bound to fall out of fashion and, number two, they’re not even very good headphones and second of all, Beats – the music service – is really just a B2 subscription service.  It’s a thin overlay of the old Mog, or Mog service.  There’s much better music subscription services such as Spotify and even Pandora, which is free; so it’s a little hard to understand.  They bought headphones that aren’t that good.  They bought a music service which is very substandard, in my opinion.

SPEAKER:  Playing a little catch-up, perhaps.

JON:  So, I think they’re playing a little catch-up and this worries me, because Apple used to be the company that was the leader, and now it’s clearly; it’s a company that’s lagging and trying desperately to catch up. 

SPEAKER:  Thank you, Jon.  Thanks for joining us at Moneyshow.com. 

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