Fund or
affiliation
- T. Rowe Price Growth
Stock Fund, started 1950.
- T. Rowe Price
Associates Inc.
Methodology
- A pioneer in growth
investing.
Research Techniques
Employed
- Defines growth
companies as one with "long-term growth of
earnings, reaching a new high level per share at
the peak of each succeeding major business cycle
and which gives indications of reaching new high
earnings at the peak of future business
cycles." It may however, have declining
earnings within a business cycle.
- Price’s
requirements for growth companies:
- Superior research to
develop products and markets.
- A lack of cutthroat
competition.
- A comparitative
immunity from government regulation.
- Low total labour
cost, but well-paid employees.
- Statistically, 10%
ROIC, sustained high profit margins, and superior
growth of EPS.
- Two aspects of
capitalizing on the "fertile fields for
growth": identifying a growth industry,
and settling on the most promising company
or companies within it.
- Two best indicators
of a growth industry: unit volume growth
of sales, and net earnings. Both improving
right through down phase of a cycle ("stable
growth") or showing improvements from cycle
peak to cycle peak, or cycle bottom to cycle
bottom ("cyclical growth").
- Qualities of a
company that may contribute to their superiority
are:
- Superior Management.
- Outstanding
research.
- Patents.
- Strong finances.
- A favorable
location.
Trading/ Valuation
Techniques Employed
- Switching between
cyclical growth and stable growth. During the
bottom of a bear market, buy washed-out cyclical
growth stocks to get the kick coming off bottom,
then switch to stable growth stock that never
went down so much.
- Amongst other
criteria, the P/E one should target is 33% of the
lowest P/E touched during the last few market
cycles. Once the target is reached, he buys
vigorously, without "bottom fishing".
- Sell when there is a
decline in ROIC, that is a warning of an onset of
maturity.
- When risen above 30%
over his upper buying limit, he sells 10%. Then a
further 10% rise prompts the sale of another 10%.
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Philosophy
and beliefs
- The investor’s
best hope of doing well is by seeking the fertile
fields for growth, and then stick with the best
companies in the highest growth industries as
long as their progress continues.
- The most profitable
and least risky time to own a share is during the
early stages of growth.
- Price’s first
interest was always in superior performance;
craved immortality in the record books.
- Price did not
believe in specific predictions, "no one can
see ahead 3 years, let alone 5 or 10".
"Valuation models" popular in Wall
Street are highly suspect if not worthless.
History and other
facts
- The phrase "T.
Rowe Price approach" is instantly understood
in Wall Street; like "a real Ben Graham
situation".
- Price, at 82, still
got up at 5 am. He was exceedingly disciplined
and organized.
- He was dictatorial,
and tend too often to compete with the men he is
managing; and with ill consequences.
- He did not believe
his firm will grow after he left and turned down
an offer to share future profits, only to see the
assets managed increased 4-fold in the next 5
years.
- He claimed: a
nonprofessional could carry his approach out
successfully.
- Towards the end of
his career, Price even stopped contacting
companies firsthand in making his own decisions,
relying entirely on company reports, his long
experience and a few secondhand sources.
- Price never carried
his argument to its logical conclusion by
comparing countries, as he did industries and
companies.
- In the late
60’s, he decided that the long bull market
in growth stocks has ended. He sold his interest
in his firm. Then, he came up with his "new
era" approach, buying natural resource
assets, real estate, etc.. and did particularly
well.
- Meanwhile, his
ex-associates kept accepting new funds and
deploying them in the same growth stocks which
are all overvalued. Collapse came in 1974, when
the term growth stock became taboo in Wall St.
- By late 1974, after
the correction, Price’s portfolio includes 3
categories: "growth stocks of the
future", older seasoned growth stocks (which
have corrected), and a mixed grill notably gold
and silver.
Examples
- The T. Rowe Price
stocks:
Black & Decker, Emery Air Freight, Avon
Products, Rollins and Fleetwood.
Performance Record
- 16% over 38 years:
"One thousand... in 1934, with dividends
reinvested,... become $271,201 by Dec. 21,
1972.", J.Train, MM pp. 143
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