Our Growth Investment Philosophy

Diversification & Growth at a Reasonable Price

by Stephen Leeb

Our growth portfolio has two pillars: diversification and growth at a reasonable price. In diversifying, we focus on stocks – most of them big cap stocks capitalized at more than $5 billion – from four groups, each of which is expected to grow faster than the economy as a whole.

The first group is energy companies, from oil drillers to the major integrated oil companies. A long-term uptrend in energy prices will ensure these will be some of the hottest growth stocks around. A second group consists of financial services companies, ranging from property and casualty insurers to bond underwriters to big banks. Technology and defense companies make up the third category, grouped together because in today’s world, increasingly technological expertise underlies our defense superiority. Apart from defense companies, our technology picks range from computer hardware to software to services.

Our fourth and broadest category is franchises, and we are including health care companies here. For one thing, the most solid health care companies are franchises. Pharmaceutical companies have patents that protect their major drugs, and they also tend to have expertise in particular research areas. Second, the health care sector no longer is growing notably faster than the economy and given likely cutbacks in government funding, growth is not likely to zoom ahead any time soon.

These are our four core groups. In addition, we are adding a final category made up of hedges – even though these generally don’t have growth rates better than the economy’s – as a way to protect growth investors from the unexpected. Right now the most likely candidate for such a surprise would be a pickup in inflation, and our hedges are precious metal stocks.

Now to our second pillar, growth at a reasonable price. Sounds good, but how do you define it? The first thing is that to meet our criteria, a company has to have projected growth at least as fast as that of the S&P 500 – for which current estimates are about 7 percent – and preferably 10 percent or higher. If it were possible, we’d pick only stocks with a forward P/E less than that of the S&P 500. But the market is not always so cooperative. Sometimes you just can’t find a growth stock with such a low P/E, so we’re willing to settle for a PEG – P/E divided by growth – that’s less than the market’s. One way of viewing PEG is that it’s how much you’re paying for growth. Except for our hedges, all our stocks have a PEG much less than that of the S&P 500.

At the end of the day, what we have is a diversified collection of stocks that on average are much more cheaply valued than the S&P 500. Basic logic says such a portfolio should, over time, sharply outperform the S&P 500 – assuming, of course, our earnings and growth estimates are on target. And that’s where our ethic of unrelenting hard work will come into play.

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"The traditional allocation is among stocks, bonds, and cash. We think this is a meaningless approach and investors should think strictly in terms of growth, income, and market insurance."

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Our Growth Investment Philosophy

Diversification & Growth at a Reasonable Price

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