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Beware the Official “Growth Stock”

May 07, 2013



Beware of the well-known companies that everyone regards as “official growth stocks.”  These institutional favorites generally have already experienced their best earnings growth and are too obvious once they are officially termed growth stocks.

 

Circuit City was a pioneer in the “superstore” space; the stock price soared during the 80s and 90s.  From 1981-2000, Circuit City’s stock price advanced more than 63,000%! The Richmond Virginia based big-box retailer Circuit City filed for bankruptcy in 2008.

 

In the 1980s, Circuit City was one of the nation’s strongest retailers, but then came a series of critical missteps that accumulated over time. In the 1990s, they leased inferior locations and failed to deliver a pleasurable shopping experience. Circuit City’s best growth came during the period when the company was relatively small however, its problems accelerated as it grew much larger.  In 2008, Circuit City was still the nation’s second-largest dedicated consumer electronics retailer after Best Buy, with more than 700 stores.

 

The company planned to close 155 existing stores, open fewer new ones, renegotiate some leases and cut staff members at its headquarters. This is the opposite of what you see during a company’s expansion phase when the future for growth looks bright. Those who stubbornly held shares of Circuit City watched the stock price go to zero in 2008 and they lost everything.

Circuit City

 

Even powerhouse companies such as Cisco Systems and Dell Computer fell on very hard times after they were widely accepted as "Growth Stocks" in the 1990’s. 

 

 

 

This is nothing new. In the 1960s, Avon Products became so popular that the stock price ran up way ahead of its earnings, resulting in a price advance that took the stock from $3 in 1958 to $140 per share in 1972. Then the stock topped out and plunged from $140 to $19, an 86 percent drop in only one year. Fourteen years later the stock was still at $19 a share.

 

More recently, Apple Computer has come to be known as one of the great turnaround situations turned Official Growth Stock.  After experiencing a period of severe margin pressure that caused the stock price to correct more than 80% from its peak in 2000, the company released new “I” products in 2001, 2003 and 2007.  Margins grew each year for a decade.  Consistent earnings, sales and margin growth morphed the company’s status from laggard to turnaround to a must own growth story.  Since, Apple’s stock has topped and declined 45% from its peak.

 

 

Every stock eventually goes down in price precipitously; it’s just a matter of time. If you want to achieve great success in stocks, learn to fall in love with dynamic leaders in new uptrends not a company’s name or status.  Often, the best growth candidates are companies that you never heard of before. When a stock reaches "Official Growth Stock" status, BEWARE!

 

Mark Minervini

 



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