10 Reasons Why Growth Stocks Can Be Appropriate For Retired Investors by Chuck Carnevale, F.A.S.T. Graphs
In recent weeks I received several questions and comments from readers regarding my views on the appropriateness of investing in growth stocks in retirement portfolios. Additionally, and on a related topic, I have also come across numerous discussions, sometimes quite heated, about whether it’s best to invest for total return or growth of dividend income. Consequently, I thought it would be interesting to share my views and provide my perspectives on both the appropriateness of growth stocks, and/or whether it’s best to invest for total return or income growth.
Generally speaking, I do not believe there is a perfectly correct answer to whether growth stocks are appropriate in retirement portfolios or not. Instead, I believe that it depends on many factors that specifically relate to each individual investor’s unique situation. More specifically, these include their financial resources, investing goals and objectives, and perhaps most importantly, their tolerance for risk. With this article I will offer 10 reasons or situations where I believe growth stock investing might be appropriate in retirement portfolios under certain circumstances.
In the same vein, I also do not believe there is a perfectly correct answer to whether it’s best to invest for total return or income growth. However, here I will add that I do not believe that the two concepts, total return versus income, are mutually exclusive. Under the correct circumstances, prudent and rational investing practices can generate both simultaneously. I do not believe that you have to give up attractive total returns for income, and vice versa. But regardless, I see no reason to argue about it, and believe in affording each investor the freedom and right to follow his or her own personal and/or suitable path.
Finally, I am a fervent believer that investors should be knowledgeable and aware of all the investment options at their disposal. In other words, I do not favor a myopic approach nor do I favor being overly zealous about one investing strategy over another. Instead, I believe all investing strategies should be fairly and knowledgeably evaluated so that they can be clearly understood. Once that is accomplished, then rational decisions can be made regarding whether or not a certain strategy is right for you.
10 Conditions or Circumstances When Growth Stocks Might Fit in Your Retirement Portfolios
Before I provide the 10 circumstances where I believe growth stocks might be appropriate in retirement accounts, I feel it’s only fair to point out that I have long admired the power, performance and even protection that a great growth stock can offer investors. Consequently, much of what I’m about to write is colored by my own biases and perspectives. In this regard, I am only sharing my own views and will let the reader draw their own conclusions. However, not all of what I’m about to present is bias. Much of what I will be talking about is based on factual analysis, and as such, I would hope the reader takes that into consideration as they review the following 10 reasons.
1. Performance Considerations-Opportunity for Significantly Higher Total Returns
There is one undeniable fact about true growth stocks that is nevertheless hotly debated and argued about. In truth and fact, a pure unadulterated growth stock under the strictest definition is capable of dramatically outperforming most blue-chip dividend paying stocks. And as I will soon demonstrate, the total return differences are not subtle, they are significant and profound. However, I contend it is also an undeniable fact that the risk differential between true growth stocks and blue-chip dividend paying stocks is equally as significant and profound.
In order to illustrate my point, I offer the following performance histories on 3 high profile growth stocks compared to the average company represented by the S&P 500 over the past 10 years or so. There are a couple of reasons why I specifically chose the timeframe covered. First of all, each of the example companies and the S&P 500 were all fairly valued at the beginning of this time period. Therefore, their performances are all being calculated fairly.
Second, I chose this timeframe because a decade of time is adequate to illustrate a long-term performance calculation. Finally, I chose this timeframe because it included the Great Recession, which I hope we would all agree was a very challenging time to be investing in equities.
The following performance calculations are based on a single $10,000 investment in each company at the beginning of the time period. None of these examples pay a dividend, but in spite of that fact, they each produced total returns that were orders of magnitude greater than the S&P 500. As an aside, commonly held blue-chip dividend growth stocks such as Johnson & Johnson, Coca-Cola, Procter & Gamble and General Mills all produced total return performance results that were within the same scope as the S&P 500.
I have also included the 12-year historical earnings price and correlated FAST Graph on each example. I have circled the earnings growth rates on each graph to illustrate how a growth company’s historical earnings growth rate correlates and relates to the performance it generates for shareholders.
To get a free, more detailed perspective on Growth Stocks, follow this direct link to a video on my site mistervaluation.com, and watch and listen to me analyze Growth Stocks out loud via the F.A.S.T. Graphs™ fundamentals analyzer software tool.
Celgene Corporation (CELG)
Baidu Inc (BIDU)
Company description, courtesy of Seeking Alpha:
“Baidu Inc is a Chinese language Internet search provider. The Company offers a Chinese-language search platform on its website Baidu.com.”
Company description, courtesy of Seeking Alpha:
“Actavis PLC specialty pharmaceutical company engaged in developing, manufacturing and distributing generic, brand and biosimilar products.”
As investors, we can never invest in the past, only the future. Therefore, I offer the following F.A.S.T. Graphs™ Forecasting Calculators on each of the three examples above to illustrate their potential total return performance over the next couple of years based on consensus analyst estimates. For the reader’s additional perspective, I also include the same Forecast Calculators for the blue-chip Johnson & Johnson (JNJ) and one for the S&P 500.
The bottom line based on reason number 1, is that investors in retirement should at least be aware of the differentials of potential returns that true growth stocks can offer. However, I would caution that due to their higher risk, growth stocks should be utilized judiciously and sparingly. But that is not to say that they should never be included in retirement portfolios.
2. Today’s Growth Stock Can Become Tomorrow’s Dividend Growth Stock
The second reason or situation when growth stocks might be appropriate in retirement accounts is that they often provide the opportunity to