Whether a buy and hold investment strategy is a good idea or not, is one of the most hotly debated investing concepts. From our point of view, the best answer as to whether buy and hold is a good strategy or not is that it primarily depends on the specific company or companies being considered. In other words, there are some companies that can and should be bought and held, and conversely, there are companies that should not. And, equally important, you could pay too much for even the best company. Therefore, the principle of valuation is a second component behind implementing a viable buy and hold strategy.
This logically moves us to the question of how do we define exactly what a correct, or good, buy and hold company is? Once again, the answer will be dependent to a great extent on the goals and objectives of the individual investor. For an income investor, the current yield coupled with the company’s history of dividend growth would be important considerations. On the other hand, the aggressive growth investor will be most concerned with earnings growth and the price they have to pay to buy that growth. There are many nuances and calibrations between the pure income investor versus the pure growth investor that need be applied in order to correctly answer the question regarding exactly what is a good buy and hold company.
The points we are endeavoring to illustrate are that buy and hold is an excellent strategy if it’s properly executed. This means finding companies with the right characteristics to meet your goals and objectives, and then having the discipline and prudence to only invest in them when they make good economic sense. When this is done correctly, then buy and hold is capable of producing appropriate returns at controlled levels of risk. And perhaps the most critical point is that the decision as to whether buy and hold is a smart idea or not is a question of specifics, not generalities. One of our pet peeves is how people attempt to argue the laurels of a buy and hold strategy by providing evidence based on general markets or indices. Frankly, there are always a lot of companies in every indice that should not be bought and held.
Executing a Smart Buy and Hold Strategy for Growth
Since pure growth stocks typically do not pay dividends, the pure growth investor’s only real source of return is capital appreciation. Therefore, if your investment objective is growth, we believe there are several critical metrics that should be measured and focused upon. The first would be the rate of change of earnings growth, because capital appreciation will be solely a function of the marketplace capitalizing future earnings. Next, it’s important to understand that the price or value you pay to buy the future earnings growth will have a great impact on both the return and the risk you take to generate it. Finally, the consistency or reliability of the company’s record of earnings growth will usually correlate to how consistently the marketplace prices the company’s stock.
Therefore, when attempting to identify above-average growth stocks we place a very high premium on what we like to call the confidence factor. Our confidence will increase based on the consistency and the duration a respective company’s earnings growth achievements. Also, in addition to being consistent, we also seek above-average rates of growth. Our own research indicates that an above-average earnings growth rate of 15% to 20% is both achievable and sustainable for truly above-average businesses. There are some growth stocks that can even grow faster than this, but they are very rare. Furthermore, although the law of large numbers will inevitably take its toll, well-positioned companies in appropriate industries can grow at these high rates for decades. An appropriate industry is one that facilitates the company’s ability to grow based on its market opportunity and/or advantages such as patent protection, etc.
Diagnostic Testing and Clinical Laboratories – A Reliable Growth Industry
To forecast future earnings growth with any degree of accuracy, it seems logical to place great emphasis on recognizing major future investment opportunities. One way to identify growth opportunities is through the study and monitoring of demographics. For example, we believe that a great opportunity exists from understanding the economic impact of our population’s current bi-modal distribution, namely, the graying of America and the baby boomer generation. Understanding the consumption tendencies of these and other demographic segments allows us to make informed forecasts as to the future health of several industries that will serve these large and growing markets.
Of course, healthcare naturally comes to mind when looking for growth opportunities available from an aging population. On the other hand, healthcare is rapidly becoming politicized and, therefore, seekers of profitable growth need be very discerning. On the other hand, the demographic forces behind healthcare as a growth industry are obvious and undeniable. But as we will soon illustrate, diagnostic testing and diagnostic testing laboratories are a small part of the huge healthcare pie, but this industry has a large influence on the outcomes and utilization of the entire healthcare segment.
Three Growth Stocks in a Well Defined Growth Industry
Modern medicine has come a long way from the days of the home visit from the family doctor with his little black bag of medical supplies. In modern times, the proper diagnosis and treatment regimens have become far more efficient and applicable thanks to the results from tests performed in the clinical laboratory. The ability to pinpoint the exact presence or absence of disease provides the data needed to prescribe the most effective treatment. This not only supports better patient outcomes, but also reduces costs from providing unnecessary or improper treatment therapies.
In summary, laboratory tests play an important role in the detection, diagnosis, and treatment of many diseases. But most importantly, it’s cost effective and supportive of better patient outcomes and results. There are many healthcare experts and professionals that would agree that the practice of modern medicine would be impossible without the tests performed in the clinical laboratory. From an investor’s point of view, these facts support an attractive growth industry to examine further. This article will look at three leading companies in the important diagnostic testing industry.
About Bio-Reference Laboratories, Inc. taken directly from their website
“BRLI is a clinical testing laboratory offering testing, information and related services to physician offices, clinics, hospitals, employers and governmental units. We believe that we are the fourth largest full-service laboratory in the United States and the largest independent regional laboratory in the Northeastern market. BRLI offers a comprehensive list of laboratory testing services utilized by healthcare providers in the detection, diagnosis, evaluation, monitoring and treatment of diseases. BRLI primarily focuses on esoteric testing, molecular diagnostics, anatomical pathology, women’s health and correctional health care.”
The following slide taken from the company’s investor presentation provides an excellent summary of Bio-Reference Laboratories’ business model that includes important niches. We especially like the opportunities from their genetics business Gene Dx. We believe that designer medicine based on DNA sequencing represents a major long-term growth opportunity. Since being acquired by Bio-Reference Laboratories in 2006, this specialized genetic laboratory has already grown over six-fold. With that said, we see growth potential over their entire