Invest in Great Growth Stocks Now

by Timothy Lutts on February 07, 2013
originally from Cabot Wealth Advisory
Blast-Off

Invest in Great Growth Stocks Now

10 Stocks to Hold Forever – Part Seven

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Thirteen years ago, all my hair was dark.

Thirteen years ago, I didn’t wear glasses.

Thirteen years ago, I could eat my wife’s homemade chocolate cookies daily and not gain a pound.

And thirteen years ago was the last time investors were really excited about investing in the stock market.

So it makes sense that even though the market has done THIS in the past 12 weeks …

CHART OF DOW November 15 to PRESENT

… no one is excited!

Because a lot of changes have occurred over the past 13 years.

The stock market has been so challenging over the past 13 years that investors have learned to treat these bursts of strength as selling opportunities. They’ve had all long-term bullishness conditioned out of them!

Furthermore, because we’ve been through numerous economic trials in the past 13 years, almost everyone is less optimistic about the future.

So why is the market going up? Because professional investors see opportunity. Because professional investors see value. And because professional investors know it’s better to buy early than late.

Some of these professionals have noted the market’s recent “Volume Thrust.”

Others have noted a “Breadth Thrust.”

Still others have noted a “Blast-Off Indicator.”

The message from these three signals (and others) is clear. Money is pouring back into the market at an unexpectedly rapid rate, and it is likely to continue far longer than the vast majority of today’s investors expect.

(One major long-term reason, which I won’t get into here, is that there is a ton of money sitting in so-called “safe” havens like cash and bonds. But rising interest rates—and thus falling bond prices, combined with a less-gloomy global outlook, have begun to nudge some of that pile of money back into stocks. And the trend has only begun.)

So I’m bullish, and I urge you to invest in great growth stocks now, before all your friends do.

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In recent weeks, I’ve been writing a series called “Ten Stocks to Hold Forever,” featuring 10 stocks, selected by Cabot editors, that you might choose to, well, “hold forever.” 

The seventh stock is Salesforce.com (CRM), and it was selected by Mike Cintolo, editor of Cabot Market Letter and Cabot Top Ten Trader.

Unusually, Mike has not found an opportunity to do a large write-up on CRM; he only added the stock to his model portfolio in mid-December. The stock is up 7% since then.

Just yesterday, however, he did write this:

“Salesforce.com is off to a good start for us, leaping out of its two-year base this week on good volume. We’ve written about the company often during the past year; its various business software products boost productivity and are winning more and more big deals than ever before. We see this as an institutional-quality stock with years of rapid growth ahead of it ... just the kind of name that big investors can pile into, especially if the economy picks up steam. We think you can buy some around here.”

So here’s my additional input.

Salesforce, as most businesspeople know, provides applications that enable marketers and salespeople to organize their prospects, plan marketing campaigns, track their results and more. It’s useful in virtually all industries.

Previously labeled software-as-a-service, now it’s a major player in the Cloud. It works great on mobile devices. And because users pay on a recurring basis, repeat business is especially high.

The company had almost $3 billion in revenues in the past 12 months, and revenues are growing at a better-than-30% rate, fairly consistently. Earnings growth is less regular, because of investments and acquisitions, but it is clearly up. In 2012, the company earned $1.40 a share. For 2013, analysts are estimating $1.52. It’s probably conservative. Finally, after-tax profit margins are healthy, ranging between 6% and 10% in recent years.

That’s low for a software company, but it reflects both the investment in growth and the fact that revenues come in a steady stream rather than in big chunks.

In sum, Salesforce is king of the hill in its industry, and there’s no one on the horizon that looks capable of altering that, so profit growth looks exceptionally reliable.

And that’s why you could hold CRM forever.

But you don’t have to. In fact, I recommended CRM in Cabot Stock of the Month (the advisory I edit) back in August of 2009 when it was trading at 52. It did very well, and I recommended selling in September 2010 at 112 for profit of 113%. Those who held now have a profit of 227%.

Finally, a word about valuation. CRM has a P/E ratio of 111, and that will seem high to some people.

But back in October 2009, after I recommended CRM as the Cabot Stock of the Month, I received the following email from a Dr. Walker in North Dakota. (It’s amazing the stuff that my computer saves!)

“I was considering acquiring some new stock in Salesforce.com (CRM) as per the 'Stock of the Month' recommendation. I noticed that the Price/Earnings ratio is rather high at 110. In my very beginners understanding, that seems to me a bit of a mini "stock-bubble," where the price of the stock has far surpassed the company's actual/current earning power. I also do understand that this P/E ratio is a way of assessing "value" and that this high number means it is definitely NOT a 'blue chip stock.' Nevertheless, it gives me some cause for concern.”

So here we are more than three years later, with CRM up 227%, and its P/E is virtually unchanged! In general, it’s a great reminder that P/E has little value for growth-oriented investors.

Admittedly, CRM is different; One factor in its high P/E is the revenue structure. It makes earnings look lower now, but adds more certainty about the future. And that’s not going to change, so there’s no reason to worry about the P/E.

So I recommend investing in CRM for the short-term, and then contemplating holding for the really long-term.

Better yet, I recommend getting more great investment ideas from Cabot Market Letter.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Editor of Cabot Stock of the Month

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Follow our "Forever Stocks" series. Sign Up FREE for the Cabot Wealth Advisory Here!

10 Forever Stocks – 2013:

The sixth stock in the forever stocks series is a company that focuses mainly on people in a professional network, and on giving them tools and connections...

The eighth forever stock to buy is one of the world’s leading owners of containerships. Management is top-notch and there’s a very fat dividend yield...

This forever stocks series was introduced with Thomas Phelps's Stocks to Buy and Hold Forever idea...

more Best Stocks to Buy


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