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Investors Not Going For Growth

December 26, 1988

NEW YORK (AP) _ The once-hallowed Wall Street tradition of investing in growth stocks has fallen on very hard times of late.

The crash of 1987 had something to do with that. But as statistical measures show, the big market break only accelerated a trend that has been in motion for at least five, and maybe as much as 15, years.

All this is documented by the investment firm of Kidder, Peabody & Co., which publishes a monthly compilation of what it calls the ″Top 50″ - the 50 issues traded on the New York Stock Exchange that carry the highest price- earnings ratios.

As you might expect, this list is typically dominated by companies with strong growth records: For example, Coca-Cola, Walt Disney, and Merck and Eli Lilly in pharmaceuticals, as well as smaller entities like J.M. Smucker and Tootsie Roll Industries.

Logically, stocks of companies that demonstrate the ability to produce above-average growth should sell at higher PEs than those with more modest prospects. And they do.

But the difference between the median PE of Kidder’s Top 50 and that of the market as a whole, represented by Standard & Poor’s 500-stock composite index, has lately contracted to the smallest premium it has ever shown in calculations dating back to 1960.

In the 1960s and early 1970s, the Top 50′s PE sometimes was more than three times that of the general market. As recently as 1983, the premium stood at 2.5 times.

In November it fell to 1.3 times the market multiple. In effect, extra growth is being offered in the marketplace at almost no extra charge.

What brought about this devaluation? It started in the ’70s with the collapse of a style of investing that focused on what were called ″one- decision″ stocks.

Under this philosophy, money managers at investing institutions bought stocks of glamour growth companies with the presumed intention of owning them forever. It didn’t matter very much how dearly you paid for these stocks, since you were never going to sell them.

Then the recession and bear market of 1973-74 knocked down that notion with a resounding thud.

More recently, says Kidder Peabody analyst Evelyn Feit, several forces have combined to compress the Top 50′s premium - among them the takeover and buyout binge.

″Investors’ attention has been focused on immediate rewards reaped through buyouts, restructurings and such, rather than on the long-term investment potential of growth stocks,″ she observes.

″This has been accompanied by a diminution of confidence in growth projects.″

Tax reform also did growth stocks no favor by eliminating the special tax break for long-term capital gains. Capital gains are the prime allure of these stocks, since fast-growing companies usually pay modest (or no) dividends.

Now that all investment income is taxed at the same rates, the fashion has shifted markedly to a ″total return″ approach.

That left growth stocks more vulnerable than before to competition from low-risk, interest-bearing investments, especially when the rates those investments pay get as high as they have been lately.

Since the change in the tax rules was a one-time event, Ms. Feit suggests, the blow it dealt to growth stocks was ″probably a one-time adjustment.″

The way she sees it, all this may represent an opportunity for bargain- consci ous investors who believe growth won’t stay out of vogue forever in the investment world.

″The growth sector appears positioned to show improved relative performance,″ she contends, ″perhaps as early as 1989 if past patterns are repeated.″

End Adv Monday Dec 26

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