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Big growth stocks loom large amid search for safety
Chicago Tribune - Bill Barnhart

Chicago, June 13th, 2007: As the stock market resumed its June swoon Tuesday some analysts thought they spotted a silver lining.

Bespoke Investment Group, a new financial research Web site that gets a thumbs-up rating from me, notes that large-company growth stocks outperformed large-company value stocks for eight days in a row recently.

As the accompanying charts show, growth stocks aren't exactly lapping value stocks. But it's the first time for such a streak since November 1999.

According to Paul Hickey, co-founder of Bespoke -- a British term referring to custom-made suits -- there have been only four such streaks since 1990. Moreover, the streaks tend to spark superior performance by growth stocks for several months.

Large-cap growth stocks generally are defined as big companies (at least $10 billion in stock market value) with higher stock prices, relative to their earnings per share, than the Standard & Poor's 500 index. Big technology and health-care stocks typically are labeled large-cap growth. Utilities and materials suppliers are termed value.

The growth/value divide used to define clearly an investor's preference for risk and overall approach to the stock market. Growth investors were said to be the bigger risk-takers. But the distinction has faded in recent years, especially since highflying tech growth stocks cratered in 2000.

Currently, money managers who favor large-cap growth stocks define them as companies with consistent records of sales and earnings growth and P-E ratios better, even just slightly better, than the S&P 500 P-E, at 17.

Intel, with a P-E of 26, is emblematic of the new definition. Amazon.com, with a P-E of 119, is a growth stock under the traditional definition. Both stocks have beaten the S&P 500 index as interest rates climbed.

"Theoretically, growth stocks should be hurt by higher interest rates," said Hickey. "It seems counterintuitive."

But the sector as currently defined might gain favor as a defense against higher rates, for two reasons: Large growth companies offer global reach in a robust world economy, and the stocks have been ignored in favor of small-company, commodity-based and foreign stocks.

"It's been a horrific seven-year period for large-cap growth," said David Brady, a large-cap growth manager based in suburban Geneva. Brady says the prospect of large-cap growth asserting itself this summer is strong, in part because the group scored poorly in June and July of last year.

"It is without a doubt the most unwanted sector of all market sectors," Brady said. "We are seeing signs of that changing."

Investors have heard that viewpoint many times in recent years, as value and small-cap repeatedly outmatched growth.

But as the 12-month-old stock market rally faces the current speed bump, short-term gains by large-cap growth stocks could look like a safe harbor amid higher interest rates and receding profit growth.

"Generally, growth-oriented companies don't have as much debt and don't rely on the debt market as much as value companies," said Jack Ablin, chief investment officer at Harris Private Bank.

"And growth companies have a more powerful earnings engine. As earnings start to slow investors are starting to discern who are the earnings survivors."

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