Edwards mentioned a recent discussion he had with a growth manager whose fund portfolio was 40% comprised of financials, a traditional value sector that the manager nonetheless saw as a place with good growth opportunities. "That highlights the difference between investing in a specific style and investing in companies with depressed prices that might have upside potential," says Edwards.
Thornburg Core Growth fund manager Alex Motola doesn't worry about the semantics of investing styles. He looks for companies with top-line growth exceeding GDP growth or that has a clear path to get there, and feels his bottom-up approach simplifies his investing process. "We're just trying to find the best investments," he says. "I think it's ludicrous for investors to constrain themselves by cap range or growth versus value considerations."
The fund has profited nicely from Las Vegas Sands and Google, and Motola sees upside in both companies despite their huge run-ups. He says that casino operator Las Vegas Sands has an interest in seven of the ten top properties being built on the strip in Macau, the Chinese enclave that passed Las Vegas in gambling revenue in 2006. It also has a strong presence in Singapore.
In early March, Las Vegas Sands traded roughly 50 times estimated 2007 earnings. But Motola wasn't deterred by the valuation because he believes the company's story is about long-term cash flow. Similarly, he's not worried about Google's stratospheric stock price, particularly given the company's track record of blowing away consensus earnings forecasts and its aggressive forays into various media. "We're looking at higher earnings growth than most people expect," he explains, "and that means a lower multiple on a forward-looking basis."
Google is a throwback to the good old days of late-1990s growth investing, when high-octane tech companies seemingly had boundless futures and people willingly paid hefty premiums to own them. In early March, Google shares traded north of $440 and sold at roughly 39 times estimated 2007 earnings, or more than double the multiple on the S&P 500 and about 50% greater than the multiple on the S&P tech index. Motola and others argue that the company is reasonably priced based on its past phenomenal growth and its long-term potential.
Market analysis firms Standard & Poor's and Russell both recognize that there are different shades of growth, and they try to account for that when assigning stocks to their respective indexes. For instance, Russell employs a method that looks at relative price-to-book ratio and I/B/E/S long-term growth forecasts to gauge a stock's growth and value characteristics (treating different cap sizes separately to avoid distorting relative valuations). It combines the two measures into a composite ranking that's the basis for assigning growth and value weights to each stock. Stocks at opposite ends of the scale are considered more or less pure growth or value, and those in between incorporate both features and are weighted proportionately in the growth and value indexes.
"Many money managers are flexible and go in and out of the soft middle ground," says Lori Richards, client service director of the Russell indexes. "Holding managers to strict growth or value measures creates high turnover and leads to missed opportunities found in the middle ground."
General Electric might be the poster child for that middle ground. In 2003 the company's robust long-term growth forecast and relatively high price-to-book valuation placed it 100% in the Russell 1000 growth index. These days, GE's growth and value weightings within the Russell system are at 50/50 due to lower growth expectations and valuation.
T. Rowe Price Growth Stock fund manager Bob Smith owns tweener companies GE, Microsoft and American International Group because he thinks they'll grow faster than the market even as value managers like them because they're relatively cheap. Smith believes growth stocks have disappointed during the past couple of years because their performance was drowned out by the market's overall strength. "I would've thought a company growing earnings by 12% to 14% would be considered good," he says, "but in reality it's just average. We missed that, and I think it's a timing issue."
Going forward, Smith likes the health-care services sector and such companies as UnitedHealth Group, Caremark RX and WellPoint. He also has sizeable international exposure through the likes of GE, global banker UBS, Canadian telecom giant Rogers Communications and Indian telecom company Bharti Airtel. He thinks that materials and energy are good long-term plays that'll probably underperform in 2007.