Another Way To Pick a Stock in Today’s Market – Think Growth

Friday, February 12, 2010

Plants growing towards skyWednesday, I outlined “12 Steps To Getting Your Investment Mojo Back.“ Then, yesterday I discussed finding stocks that meet the characteristics discussed under the “Take action” section, using a “spring and levers” approach. Today, I want to focus on growth.

Once again, we are looking to identify leading, dividend-paying companies. But this time we are interested in finding those that can grow faster than the economy. My examples will be Intel (INTC) and Walmart (WMT).

There are two main routes companies can take to grow faster than the economy:

  1. Operate in a fast-growing and/or rapidly changing industry
  2. Increase market share

Operate in a fast growing and/or rapidly changing industry

What probably comes to mind first is technology. Chart books are filled with dazzling graphs of winners in this exciting field. They’re also filled with also-rans and wipe-outs because the environment is highly competitive and forever transforming.

Besides people and resources, being a long-term technology leader requires being in the right place. Intel is a good example. Its success centers on the “chip,” which continues to be the heart of computing technology.

Although it doesn’t produce the equipment that uses the chips, its sales are dependent on those products. Therefore, with many companies and consumers holding off making new purchases over the past couple of years, Intel has the added opportunity of seeing the “spring” effect discussed yesterday – the potential for a double whammy of growth.

Technology is especially energized by the “spring” effect because the rapid advancements in speed, capability and productivity make past equipment outdated quickly.

Increase market share

Even in a stable or moribund industry, a company can create a growth path by carving out a niche or developing a strategy that better serves customers. Many of today’s leading companies accomplished this by bettering their competitors in products, services, delivery, cost and/or quality.

Typically, such a company focuses on one area, while keeping other areas “acceptable.” Walmart is a good example. Its success centers on being a price leader in many product areas. Quality, choice and service are adequate.

Consumers desire Walmart’s approach throughout the US and the world – so much so, that we read about communities resisting Walmart’s arrival for fear the current (higher priced) businesses will suffer. Like any protectionist movement, the barriers eventually fall. Too many consumers (AKA voters) want what Walmart has to offer. And this weak economy has brought many new shoppers to their stores.

Each October, Walmart meets with investment analysts to describe growth plans for the coming year. Because Walmart rode through the recession so well, continuing to earn over $3 billion dollars per quarter, they have both the desire and resources to expand further. Their latest growth plan reflects that, with capital expenditures rising this year and next.

So, adding Intel and Walmart to yesterday’s picks of Boeing and Caterpillar, we have an interesting mini-portfolio. Each stock is attractively priced, pays a good dividend, is a leader in its field and contains the elements to benefit well from the economy’s return to normal and eventual resumption of growth. Each company has drivers distinctly different from the others, and that is the true definition of diversification.

Importantly, owning these companies, or ones like them, can help you get back into the US stock market comfortably, earn some good income and be positioned for the growth ahead. Starting with leading companies like these will also build (or rebuild) your knowledge, experience, feel and confidence in stock investing. It’s a great way to get your investment mojo back.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

February 2010