Summary
A GARP investing approach based on identifying companies with long-term prospects in their early stages before they become "glamour" stocks.
Background
Considered by some to be "the father of growth investing”, T Rowe Price started investing in the 1920s. He founded T. Rowe Price Associates in 1937, a firm which has subsequently grown to manage assets of over $300 billion. His innovation was to depart from the then conventional wisdom that all stocks were cyclical, argung instead that most companies passed through a life-cycle (growth, maturity and decline). He advised looking for “fertile fields for growth” and then holding for a long time.
He defined a growth company as one which:
“has demonstrated long-term growth of earnings, reaching a new high level per share at the peak of each subsequent major business cycle and which, after careful research, gives indications of continuing growth from one business cycle to the next at a rate faster than the cost of living".
He also felt that growth companies need to be in growing industries such as new industries, divisions of old industries experiencing growth as a result of new products or new uses for old products, and specialty industries with expanding products and markets.
According to John Train of "The Money Masters", Price looked for these characteristics in growth companies:
- Superior research to develop products and markets.
- A lack of cutthroat competition.
- A comparative immunity from government regulation.
- Low total labor costs, but well-paid employees.
- At least a 10% return on invested capital, sustained high profit margins, and a superior growth of earnings per share.
“In short, invest money in a business that must cope with the minimum of consumer, labor, and government interference, that is managed by men with vision who understand the significance of the social and economic trends, and who are preparing for the future through intelligent research and development”.
Criteria
It is not easy to screen mechanically (given the long time series of data required) for one of Rowe's main criteria - he looked for companies with EPS increasing at the peak of each successive major business cycle, in order to rule out non-growth “cyclicals. Nevertheless, here are some other quantitative criteria for an indicative T. Rowe Price Screen:
- Earnings growth: Price also specified that earnings per share should be increasing faster than inflation but, given current inflation levels, this…
