While Not Overpaying For Comfort T...

While Not Overpaying For Comfort

This Babson Staff literal meaning article has been adapted from a language Mr. Gribbell recently made to a assemblage of mutual fund investors in Boston. Mr Gribbell manages the Babson pullulation Fund, which as of year period 1996 had $320 million in assets, having appreciated 22 percent during the year.

As we inscribe 1997 with the stock market at all-time highs, it present the appearances appropriate to share some of our studys on the U.S. stock market from the perspective of our increase equity group, and explain in what way these beliefs influence Babson's low-risk approach to germination stock investing and how, at the same time, we avoid overpaying for comfort.

Babson has been investing in growing stocks for over five decades and what distinguishes us from many of our contemporarys is our emphasis on controlling the on a level of risk in our portfolios, while achieving the sort of be deriveds we're after. With our depressed risk approach to growth stock investing, we definitely have an affection for high quality, rapidly-growing companies, on the other hand it's not blind love. We pay choke attention to the prices paid for companies we invest in, and constantly monitor the relative valuation of the stocks in our investable universe.

Our approach to development stock investing focuses on identifying companies with leading market positions, proven management teams with a track record of consistently superior flows strong balance sheets with depressed relative debt levels and solid cash emanates We seek to invest in firms with the competitive advantages, and the management and financial power capable of delivering sustained long-term sprouting

A useful example of such above-average growth-albeit an outermost case-is Service Corporation International, our investment in the deathcare industry. Nothing in life is more certain than death and taxes, and since the Internal reward Service is not a publicly traded company, we've chosen to contemplate to the deathcare industry for a source of visible, sustainable earnings growing in any economic environment.

Service Corp. is the nation's largest proprietor and operator of cemeteries and funeral residences The aging of the U is a efficient driver of growth in demand for funeral services, burials and cremations.

With a leading market share in the U and attractive funeral hearth operations in some key international markets, we look forward to this company to generate visible earnings shooting exceeding 20% annually for the nearest several years-regardless of the economic environment.

We do, also, have a value idiosyncrasy that we adhere to, and it is another factor that separates Babson product equity investing from other product stock managers. Value, however, is a secondary discipline, and not our major emphasis in making shooting investments. We measure a company's valuation relative to that of the overall market, relative to in what manner it's been valued in the past, relative to it's industry matchs and relative to the horizontal of sustainable earnings growth we think the company is capable of achieving.

ON COMFORT cinctures AND HIGH-FLYING STOCKS

There are numerous examples of companies that have historically grown their earnings at a 17-19% annual rate, await to grow at similar rates in the that will be and yet their common stock is generally being valued by investors at a true lofty 25-30 times next year's awaited earnings. This is even way above today's heady market multiples averaging 18 times earnings.

Investors are typically willing to pay of that kind a steep price for that coming time growth because it is predictable, stable and, more frequently than not, easy to understand. They derive a high rank of comfort from owning stocks with these characteristics. by way of and large, such stocks are valued well above our have comfort level and will not find their way into our putting out portfolios. Excitement surrounding new industries, like as the Internet and biotechnology, has flowed in many companies being valued at enormous multiples of estimated earnings. a in fact, are valued at an infinite multiple of earnings because it will be years before they generate any earnings, if for aye at all.

There are countles examples of the downside risks involved in investing in of the like kind high-flying stocks when they fail to perform as look fored The market can be merciless when faced with failure.

One latter example that comes to mind is what happened to Regeneron Pharmaceuticals' shares earlier this month At the time, the company announced that largescale proofs of a promising experimental put drugs into aimed at alleviating some symptoms of Lou Gehrig's disease failed to give any relief. Following the announcement, Regeneron which had been pinning all its faiths on this drug, saw the price of its shares dip 43% in one day's trading to complete at $10.88.

THE REWARDS OF BUYING CHEAP

Of course, the turn upside down of shooting for the stars is casting about in succession terra firma for good, les expensive stocks of companies with solid, notwithstanding that less lofty, growth prospects. What we've fix is that cheaper stocks outperform more expensive stocks above the long term.