The InvestMentor

April 30, 2003

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I’m a growth stock guy. That means I don’t mind paying a little more for an above-average grower. So how much is too much and where do you find these fast-growers?

The best way to come up with a growth-adjusted valuation is using a PEG. The P/E to Growth ratio compares the forward P/E (price over future-four-quarters estimated earnings) to the growth rate (projected long-term EPS average annual growth rate). As a rule, "the lower the PEG the better." 1.0 and below is a heck of a deal. 2.0 and above are verboten in my portfolio.

The real trick is not the valuation metric, but the second part of the question—where to find the fast growers. The best place to start is at the top of the funnel. I’m speaking of macro trends that will provide above-average growth rates for entire industries, and the companies that make them up. Below are ten of my favorite macro trends.

Our current sources of all types of energy fail at three levels: they are based on limited natural resources (and those that control them), are environmentally unfriendly, and don’t guarantee an uninterrupted source of power when in use. There are myriad companies involved with developing solutions including renewable natural resources, new technology, environmentally benign byproducts, and reliable and continuous power supply.

The Iraq war may be the catalyst necessary to increase the importance of the non-OPEC countries within the petroleum distribution arena. Several countries, particularly ones associated with "emerging economies" are working around the clock to increase production and productivity, and are continually eroding away at the global market share of the OPEC cartel.

Across the country, alternative approaches to elementary and secondary education are showing up everywhere. Magnet, private, contract, and charter schools are helping to raise the standards of all schools, and we’re better for it. There are a few investable companies that are involved directly, and many indirectly.

Non human and non organic materials that do well within the body are increasingly sought after for the variety of problems they solve. There are many device makers that are specializing in the development and distribution of replacements for organs, tissues, and cells.

Over the last decade, the generic drug makers have emerged as the likely distributor of most pharmaceuticals for the future. As investments, the best tend to be those with diversified product offerings, those going after the most expensive or most-widely-used drugs, and those companies with the deep pockets necessary to win the legal challenges that open the doors to product imitation.

Increasingly, US companies are looking overseas for solutions to their information technology needs. Overseas companies and workers provide options that work well in this increasingly cost sensitive time.

China remains the world’s most consistently expanding economy. Despite the widespread technology product contraction that has characterized the last three years for the "developed" world, Chinese use and purchase of personal and commercial technology products continues to grow rapidly.

The combination of the unabated growth in Internet users and a world increasingly worried about terrorism puts companies that promote Internet security in a sweet-spot. Given the power wielded by even an average hacker, it’s hard to see how Net security investment falls off any time in the near future.

One of the most oft-cited macro trends is the "graying of America." Yet, few have invested in a way to directly benefit over the coming decade. This is one area where the investments must be direct, and investors ought to avoid companies that are affected by Medicare policies due to the instability of the program.

Satellite has been around for a long time, and yet we still do not have cheap satellite phones or easy access to the Internet. Despite unavoidable technical limitations associated with beaming and receiving signals miles into space, low-orbit satellites will continue to be the up-and-coming telecom technology to the benefit of us all.