Think of a supermarket for a moment, filled with all sorts of sales and deals and special offers. Now imagine a sign that says, "Buy One, Get Two Free". It doesn't matter much if it's for orange juice or peanut butter, that kind of deal would be too good to pass up for most shoppers. And yet, when it comes to the stock market, investors are turning up their noses on basically the same thing on a daily basis. What that means is, since nobody wants growth right now, growth is really cheap.
"The group of stocks we follow are going to grow earnings by 15%. The S&P might grow earnings at 5%. So you get 3-times the growth for only about a 15% premium in valuations" says Scott Mullinix, who co-manages the Nuveen Large Cap Growth Opportunities Fund (FRGWX).
Typically, faster growing companies cost more, often a lot more, than their middle of the pack brethren. But lately, fear has been the dominant theme causing investors to pay up for other things.
"We can all see that the leadership in the market has been in safer more stable dividend paying kinds of companies," he says in the attached video. And when hot growth stocks like Apple (AAPL) or Chipotle Mexican Grill (CMG) miss on earnings, it only further erodes confidence and appetite for growth, thus the historically low P/E ratios.
"The most simple measure is: the group of growth stocks we follow trade at 15x, the S&P500 trades at 13x earnings," he says, before highlighting some picks.
AutoZone (AZO) makes his list not just because of the aging fleet meme, but because he says top line growth is more dependent on buying back shares and hot weather.
PetSmart (PETM) makes the cut for being the dominant player in an industry growing 6% yet still enjoys a moderate P/E .
Ralph Lauren (RL) has already paid the price for its sins, so to speak, but Mullinix feel the Polo-maker is incredibly adept at managing difficult environments. "In the face of great uncertainty, this is a brand and P/E multiple that you should bet on," he bluntly adds.
And finally, he picks Costco (COST), saying "real organic growth" places it ahead of other favorites in the Staples sector. "I would buy Costco instead of Procter & Gamble (PG), Colgate (CL), Kimberly Clarke (KMB) or Wal-Mart (WMT)."
Clearly this growth bias won't last forever and Mullinix says sentiment, demand, and performance of growth stocks can - and will - change rapidly. Or as they say in the supermarket business, On Sale Now! (while supplies last).
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