where revenues are growing at least 15% per year and earnings are growing at least 20% per year,” he says. “If earnings are growing at a faster rate than sales, that’s a positive sign for the future.”
But Hatcher cautions that these days investors need to be careful with earnings reports. “A lot of companies have profits from investments in the stock market,” he says. “With the market up, some companies are selling these investments and reporting gains, which is misleading. You should be looking at profits from operations when you’re thinking about investing in a company.”
One example of a stock that meets Hatcher’s criteria is Cisco Systems (Nasdaq: CSCO), which supplies components necessary for the growth of the Internet. “Cisco is well-known, though, so there may be greater value in up-and-coming technology companies such as Nortel Networks (NYSE: NT), Juniper Networks (Nasdaq: JNPR) and Sycamore Networks (Nasdaq: SCMR),” he says.
Thomas H. Fitzgerald Jr., president of T.H. Fitzgerald & Co., New York, looks at stock buybacks as a signal to buy. The firm, primarily an institutional money management firm (with minimum investments of $20 million required), offers the Reserve Informed Investors Growth Fund for individual investors. This fund returned a sizzling 130% in 1999. The tag “informed investor” is appropriate, Fitzgerald says, because that’s the first screen his company uses when picking stocks. “We want to invest alongside the people who really know what’s happening with a company.” That is, in order for Fitzgerald to consider buying a stock, it has to meet one of these criteria:
- The company’s officers and directors are buying its stock.
- The company has announced it intends to repurchase some of its outstanding shares.
- A substantial amount of its common stock is held by the founding family or by corporate management.
- A major outside investor has filed with the federal Securities and Exchange Commission on Form 13D, announcing a purchase of at least 5% of the company’s stock. History has shown that 13D filers tend to make good decisions based on exhaustive research. They generally focus on fundamental research, finding out as much as they can about the company, its management, products and competition, in search of good values that Wall Street has overlooked. (For more information about 13D filings, click on “what’s new” at www.fedfil.com and scroll down to “significant 13D Filings.”)
“In all four scenarios these are informed investors, and I want to be on the same side they are,” says Fitzgerald. “Lately, I’ve been investing in technology com-panies because many of them have extensive management ownership.” Examples include JDS Uniphase (Nasdaq: JDSU), SDL (Nasdaq: SDLI), Hu-
man Genome (Nasdaq: HGSI) and IDEC Pharmaceuticals (Nasdaq: IDPH).
GOING FOR GROWTH
Interest by informed investors may be a useful initial screen, but you still need to further narrow your choices. Measuring a stock’s growth prospects is a good next step. William Burman, 50, an urban planner in San Antonio, Texas, says that he applies many of the lessons he’s learned as a member of Spectrum VII, his investment club, to his own investing.