Why Growth Matters to This Value Investor

 | Nov 26, 2012 | 2:00 PM EST  | Comments
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It was pretty close to a perfect weekend around Chez Melvin. We had too much food and wine as well a rare perfect football weekend with all the right teams winning and the right teams losing. As always, the conversations around the table, on the Net and over the phone produced many topics worthy of consideration. In addition to lengthy debate on how cheap the market really is (a topic we shall explore in more depth tomorrow), we eventually got around to the age-old debate of growth vs. value.

Many people assume that because I am such a steadfast value guy, I am against growth stocks. While it is true that I am not an advocate of buying high-multiple market darlings, I do believe that growth investing works. The choice between growth and value is more of a personality issue in my eyes, as either one can work for the right person.

In fact, when I talk to my kids about investing, I emphasize being more diverse than Dad and including more growth issues as well as long-shots in their portfolios. I teach them to look for what I call undiscovered true growth stocks. Over the years, I have seen a lot of hot products and ideas turned into bad stocks by poor management. As a result, you should not just look for earnings and sales growth but use book value growth as a measure of how effectively management is reinvesting the profits.

In my model, if the asset base of the company is growing as fast as revenue and profits, it is a true growth stock. I like to get there before the big institutions, so I also look for companies that have less than 70% of their shares in institutional hands.

This morning, I ran a screen for these stocks and found some intriguing names. One of the more interesting is the Latin American telecom giant American Movil (AMX). Billionaire Carlos Slim controls about 45% of the company and has used it as a vehicle for growth via acquisition. American Movil has 246 million wireless customers as well as 30 million landline and 30 million broadband and Internet subscribers. Slim is looking to expand into Europe and has already acquired 27% of Telekom Austria and is considering moves into Spain, Sweden and Poland.

American Movil's book value and earnings have both grown by 18% over the past five years, even as the global economy struggled. The company has also moved into sports franchises and owns teams in Leon and Pachuca, Mexico. Long-term prospects for the company are strong, and investing alongside one of the world's shrewdest operators and wealth builders is usually not a bad idea. Surprisingly, only 26% of the shares are in the hands of large institutional investors.

RPC (RES) is another stock that growth-oriented investors should be following. The oil and gas services company has been hit by many of the same problems as other energy firms. The slowdown in natural gas drilling has capped revenue, and contract prices for many services are lower. Over the long run, however, management has performed very well. Revenue has grown at 20% over the past five years, and the book value growth rate of 17% exceeds the earnings growth rate of 15%.

Institutional ownership of RPC is only about 27% right now, but the large funds were buyers of the shares in the past quarter. Eighty different institutions were buyers in the quarter, and the net owned by large funds went up by a little over 2.3 million shares. When natural gas prices firm and drilling activity picks up, this stock could easily be pushed higher by investors who are looking for a way to invest in oil services. As a bonus, the stock yields almost 3%, and the dividend has been growing faster than profits, assets and revenue.

The fiscal cliff could provide a cheap entry point into another true growth name. ManTech International (MANT) sells information technology to the federal government, its two major customers being defense and intelligence. Both are slated for large spending cuts if we hit the cliff. ManTech has a contract win rate of more than 70%, but it will be tough to expand sales and earnings until Congress and the president fix spending priorities.

Management has done a great job in the past -- sales, profits and net assets all grew by more than 18% over the past five years. Fears of continued cuts and contention could push the shares down to bargain levels over the next few months. The stock yields 3.45% at today's price, and buyers of politically inspired weakness could lock up an even higher dividend yield.

I am not a growth-stock investor, but I am aware that growth investing works quite well. I also keep a list of undiscovered growth names on my desk in case we get a selloff that would make them the type of safe and cheap bargains I like to buy.

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