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Views: 222, Date:07/Aug/2016


Earnings Growth You Can Depend On


When so much seems so wrong to so many, why would any right-thinking soul own stocks? Everyone “knows” they’re too pricey. What would pull them up? A tractor!

Out back on my firm’s Washington State campus they were weed-whacking and uncovered a 1926 Farmall, an International Harvester model that revolutionized row-crop farming. Thanks to tiny, sharp-turning front wheels that meandered through rows nimbly, the Farmall turned a simple idea into big productivity gains, one of many that funneled us from half our labor in agriculture when my grandpa was young to under 1.5% now–while output grew vastly. While 1926 feels primitive, it’s just 24 years pre-my-time. Pretty new!

Technology deployers keep boosting productivity via clever ideas. Moore’s Law, Kryder’s Law, the Shannon-Hartley Theorem, Koomey’s Law and DNA technology all whiz along. Dreamers will fashion Farmall-like twists to spur upward-driving earnings growth. I’ve no clue who develops what or when long term. But it will happen. Bank on it.

If we buy out a good firm at 14 times stable earnings we get 7.1% forever (1/14)–reinvestable into growth at deferrable cap gains rates. Or we can lend lousy firms long-term cash at 5.9% pre-income-tax. What’s better? The buyout, of course. Compounding that spread becomes immense. Buying the global market captures that spread plus all future growth that Farmall-like gains assure.

 

This is the basic, valid logic for owning stocks long term. Nothing liquid beats it. Better stocks are better still. And you’re obviously better off short-to-intermediate term in an ongoing bull market. Here are five growing stocks I like now for this bull.

Recall January’s fears of China breaking. Yet the country grows, albeit at steadily slower rates, and its enormous size means GDP 5% real growth is about $1 trillion–huge. And that means more Baidu BIDU +3.05%, China’s Google equivalent. Its stock has stunk for 18 months. It stinks about every two years–then shines and should now. I keep saying big tech runs in spurts late in long bull markets. Why now? At 12 times my 2017 earnings estimate it’s been underloved too long and should respond to Chinese acceleration. It’s a great growth firm valued like a slow-growth one.

Source: Forbes.com






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