Sunday, July 09, 2006

The Changing Face of Growth Investing

While an appealing case can be made in general for growth investing, managers agree that investors have to be more careful than usual in identifying companies that offer superior growth potential.

There are increased concerns that some traditional growth sectors such as pharmaceuticals and technology, as well as some companies that have been considered leading growth companies in the past, may face slower growth prospects in the future.

Robert Sharps, manager of the Institutional Large-Cap Growth Fund, believes that various growth companies, such as those operating in areas like food and beverage, household products, and pharmaceuticals, “just don’t have the sort of growth prospects now that they once did. Technology is another sector that will not grow the way it has. It already accounts for 50% of total capital expenditures, compared with 10% in the past. It’s basically finished taking share of such expenditures. Companies like IBM, Cisco Systems, and Intel face more significant growth challenges.

“So, you have to be more selective and look for companies that haven’t already consolidated their industry and don’t already have massive share of their market and very high (profit) margins already. That might include sectors like biotechnology, HMOs, or Internet-oriented companies —- stocks like eBay, Yahoo!, Gilead Sciences, and UnitedHealth Group.

-- T. Rowe Price Report, Spring 2005

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