Growth Investing, Is Newer Better?

When searching out the best growth stocks, it’s tempting to look at ‘new’ stocks—those of young companies, or of companies that have recently gone public. But when it comes to the best growth stocks, is newer necessarily better?

I believe newer is better, and I’ll give you an example. For many years, the analysts at Cabot have had a running contest to find the best growth stocks. The contest includes Paper Portfolios, a presentation from a different person each week and a prize of absolutely nothing at all. Each new member of the Wednesday Group receives a grant of $100,000 in hypothetical capital, finds new stocks to buy and invests the ‘money’ in any stocks that aren't in the Cabot Growth Investor's Model Portfolio and that trade over a major exchange.

The amount of cash in the collective portfolios was used to help calculate our sentiment indicator, and it did a good job of serving as an overbought/oversold signal when it hit either high or low extremes. 

I can remember the first big winning stock I ever dug out. I wanted to find new stocks to buy and I found Charles & Colvard (CTHR), a North Carolina manufacturer and merchandiser of moissanite, a rare, naturally occurring form of silicon carbide. Charles & Colvard figured out how to grow huge crystals of moissanite—which has a higher index of refraction than diamonds and is harder than rubies and emeralds—and began manufacturing fine jewelry featuring the stone.

Things went really well for a while and I "bought" my first CTHR shares at around 10 in March 2005 and rode it up to as high as 26 as volume spiked in December of that year. I followed the rules, adding to my stake as the stock moved higher, then taking some profits when it formed a climax top. The stock actually put me in the lead in our Paper Portfolio contest for a few weeks, even though the people I was competing against had been using the Cabot system for many years.

Ultimately, however, (long after I liquidated my last position, fortunately) the stock fell back to a narrow range just about where I first bought it, then started a determined dive toward penny stock territory as earnings deteriorated. The stock was trading below 20 cents a share for a while. An announcement that the company had fired its CEO, Senior VP of Sales and VP of Operations gave a little insight into the turmoil into which this once-hot company had fallen.

CTHR bottomed out at about 40 cents a share, indicating that the stock market's bottom feeders have found enough evidence of potential to take a few small bites. But with volume averaging just 28,000 shares a day, the stock was an object lesson, not a real investment.  It was time to find a new stock to buy.

In fact, I'm only bringing it up to show how being involved with a growth stock, I mean really getting to know it and the company's marketing plans and the whole nine yards, can make you want to keep up with it like an old high-school girlfriend. I check up on the stock every once in a while, just like I stay in touch with old friends. But I'm never, repeat never, tempted to buy a little for old time's sake. I find new stocks to buy.

Because when you’re looking for the best growth stocks to buy, it's what's new that counts.

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