If you have seen what has happened to Netflix (NFLX) and Amazon (AMZN) today then you have a good idea why I am not a growth investor. Both of these high flying growth stocks have come crashing back to earth. A drop in stock price is normal for just about any company but these companies actually performed reasonably well and have seen their stocks drop. Amazon is expecting to grow earnings at 30%% or more for the next year. This fell under the 50% target that Wall Street had set for the stock so shared tumbled nearly 17% today. Amazon is back trading below $200 a share.
Growth Stocks Are Often Not Good Values
Meanwhile Wall Street’s least favorite stock, Netflix is down more than 35% on the day. Netflix saw its shares drop over $42 including after hours trading. The stock is all the way down to $75 a share which is a level not seen since 2010. The stock was pummeled once again as Netflix reported that it lost 800,000 subscribers. The company actually had a very profitable quarter but the slowing growth has investors concerned.
That is my primary issue with lots of growth stocks. Growth stocks often trade at earnings multiples that estimate growth rates that are clearly unsustainable. As soon as the growth slows, the stocks are hammered despite solid earnings reports. Don’t get me wrong when it comes to buying solid growth plays that trade at reasonable multiples. High priced stocks like Google (GOOG) and Apple (AAPL) are much safer investments than companies like Salesforce.com (CRM) which has a ridiculously valuation. I just think that too many investors are willing to buy growth at any price.
Value stocks may not be the darlings of stock market commentators like Jim Cramer but you are a lot less likely to get burned. I have found it much more profitable to buy growth on the cheap than to overpay for it. The best scenarios are when you can buy a growth stock that has been so beaten down that it has fallen into value stock territory.
A great example of this is when Apple was trading at $75 a share just two and half years ago or when Google dropped to under $300 a share. Right now, it is up to investors to decide if paying 10 times earnings for a company like Best Buy (BBY) is too much or is too cheap. Or is a company like Hewlett Packard (HPQ) finally a buy now that they have hired a quality CEO and the stock trades at under 6 times earnings?
Given the chance to pay 75 times earnings for a company or to pay 7 times, I will opt for the latter in almost every situation.