Fundamental Growth vs. Growth with Some Fun

Back in early March, I began a series of mock portfolios to study the nature of stocks that were as sound as could be.

I figured, well, if the fundamentals are squared up and low risk, the stock will be reliable. Maybe not a high flyer, but solid with a conservative foundation. I went over numbers for dozens of stocks and pegged the ones that had strong growth plus relatively low P/E plus accelerating EPS.

I categorized these stocks in a list I call Fundamentally Sound.

Then I took the stocks that had terrific growth, accelerating EPS, but high P/E numbers and listed them as Growth with Some Fun(damentals). All along, I expected the Fundamentally Sound portfolio to lag since the growth and risk were tempered. The opposite proved true, however, during the first two months I monitored the lists.

Well, it's now past the mid-point of July and time to revisit those lists. Fundamental Growth is up 16.4 percent as 24 of the 25 stocks are in the green. The leader is Posco (PKX) with a 60-percent gain. CNOOC (CEO), one of China's big oil monsters, is up 54%. Amazingly, their P/Es are relatively miniscule. Even with the huge runs, PKX has a P/E of just 12 and CEO is at 13.

Quite a payoff for low risk. Any growth-obsessed investor who is convinced that high P/E is the only way to go may want to reconsider. Other high flyers include China Telecom (CHA) and GlobalSantaFe (CSF), each up 31 percent.

The only stock down among the 25 in Fundamentally Sound is Procter & Gamble (PG), down 2 percent. The P/E range is from 13 to 30, still fairly low but not as it was four months ago.

The Growth with Some Fun portfolio, has rocketed after languishing for the first couple of months and is now up 25 percent. Thirteen of the 14 stocks are up, led by Baidu (BIDU) and its 78% gain. Apple (AAPL) is also up big at 65 percent. Nintendo (46 percent) and Ciena (45 percent) are also having huge advances.

The only down stock was Starbucks (off by 8.8 percent).

The range of P/E in this list is from 13 (XOM) to 172 (BIDU). My take on the second list is that we don't know how or when the next BIDU will come along. It's moving along like the reincarnation of eBay or Yahoo! (circa 1998). But we do know precisely what Apple has produced over the past few years. We just know that growth was imminent for both companies.

I think a mix of both conservative growth and off-the-rails growth can be beneficial in a bull market. It's been intriguing to follow a lot of companies that wouldn't have held my interest 10 years ago. Seems like the older I've gotten, the more I appreciate an efficient, growing business, regardless of product.

My guess is that should there be a global market retreat, the Fundamentally Sound list will hold up better. Live by the high P/E, die by the high P/E.

In the next post, I'll take a look at some other faux portfolios, including stocks recommended at the start of the year by financial writers in national media.