Growth-stock investing, which focuses on companies whose earnings are expected to accelerate at an above-average clip, isn't playing favorites this year.
It is scattering its success stories all over the place, as indicated by the divergent tales of two hot stocks each up more than 60 percent this year.
The first, MasterCard Inc., boasts nearly one-third of the world's credit cards, a processing network with room to grow and strong profit. Although it faces lawsuits on charges such as anti-competitive behavior, this also underscores its presence in the global payment industry. Archrival Visa International also is making plans to go public.
The second, Canada-based Research in Motion Ltd., is a mobile-data-services powerhouse that has 9 million subscribers for its BlackBerry and recently added China as a market. Though speculative, it has a strong balance sheet, with new models Pearl and Curve enhancing its attractiveness. The stock is splitting 3-for-1 in August.
"Growth is taking place this year across most industries and all market capitalizations, the only exceptions being housing, banking and pharmaceutical stocks," said Tom Jacobs, co-founder of Complete Growth Investor newsletter in Marfa, Texas. "Some of the hottest stocks this year are well-established businesses, not tiny players that may come and go as the wind blows."
As proof that no growth-stock size has been left behind, mid-cap growth funds are up 14 percent this year, small-caps are up 12 percent and large-caps 11 percent, according to Morningstar Inc. Each slightly leads its counterpart size in value funds, which seek bargain-priced companies trading for less than inherent worth.
Although the stocks can be volatile, no one can say big technology lacks growth potential. Apple Inc. is up 54 percent this year, global-positioning-system device company Garmin Ltd. has risen 40 percent, and Intel Corp. is up 23 percent.But while a number of large stocks have had impressive growth, smaller stocks historically outperform larger stocks by about 4 percentage points on average per year, Jacobs said. That can add up over time.
That is why he recommends Key Technology Inc., a small-cap firm that is a leading designer and manufacturer of automated sorting and processing machines for the food industry. Its stock is up nearly 70 percent and has growth potential, he said. It has strong cash flow and a backlog of orders for its systems that aim to improve quality and reduce cost.
Another Jacobs favorite is AmTrust Financial Services Inc., a property and casualty insurer specializing in worker's compensation insurance for small to medium-size businesses. The stock is up 130 percent this year, and the company increased its dividend by 25 percent. It also agreed to acquire Florida-based worker's comp insurer Associated Industries Insurance Services Inc. for approximately $41.2 million.
"It is important to have growth in an individual's portfolio through companies constantly seeking innovations and new ways to grow their businesses, but the secret is to make sure you don't overpay for that growth," said Charles Rotblut, senior market analyst with Zacks.com in Chicago. "People too often become euphoric about a company's prospects without asking themselves how much growth is already factored into the stock."
Valuations are reasonable throughout the market, Rotblut said. The question is how stocks would be affected if concerns about creditworthiness lead to a flight to quality in the bond market, making it more difficult for firms to borrow.
Oil machinery and services has become a growth driver that would continue onward even if there was a 25 percent correction in the price of oil, Rotblut said. As long as oil prices stay above $40 a barrel, he believes, refiners and big oil companies will continue to invest in new products and maintenance.
Medical-care companies have been hot and should continue to show growth, thanks largely to the Medicare Part D federal program that subsidizes the costs of prescription drugs, he said. Aetna Inc., WellCare Health Plans Inc. and UnitedHealth Group Inc. should do well, he said.
Some bravery always is required in growth investing. Mutual funds are typically the safest means. The holdings of some of the year's strongest performers are worth noting:
-- Among mid-cap growth funds, American Century Heritage is up 30 percent this year, thanks to a boost from its shares of Apple, Precision Castparts Corp., Medco Health Solutions Inc., Guess Inc., B/E Aerospace Inc., Millicom International Cellular SA, McDermott International Inc., Foster Wheeler Ltd., America Movil SAB and Corrections Corporation of America.
-- In small caps, American Century New Opportunities Fund II has risen 23 percent in 2007. Premier Exhibitions Inc., Perini Corp., Priceline.com Inc. and Green Mountain Coffee Roasters Inc. contributed to its gains.
-- For large-cap growth, John Hancock Large Cap Equity "A" is up 21 percent this year on strong increases from Schlumberger Ltd., Freeport-McMoRan Copper & Gold "B," Smith International Inc. and Alcoa Inc.
Despite good prospects, growth investing isn't for everyone.
"Right now, growth investing is in an uptrend, and if this stock market continues to advance, growth should continue its upside move," said Sam Stovall, senior investment strategist with Standard & Poor's Corp. in New York. "However, if you're a little worried about potential for decelerating earnings and rising inflation, you are probably better off investing in value rather than growth while you await that storm."
Andrew Leckey is a Tribune Media Services columnist.Copyright © 2015, CT Now