Page 310 - How to Make Money in Stocks Trilogy

L = Leader or Laggard: Which Is Your Stock? 187

In the retail sector, Home Depot advanced 10 times from 1988 to 1992,
while the laggards in the home-improvement niche, Waban and Hechinger,
dramatically underperformed.
You should buy the really great companies—those that lead their indus-
tries and are number one in their particular fields. All of my best big win-
ners—Syntex in 1963, Pic ‘N’ Save from 1976 to 1983, Price Co. from 1982
to 1985, Franklin Resources from 1985 to 1986, Genentech from 1986 to
1987, Amgen from 1990 to 1991, America Online from 1998 to 1999,
Charles Schwab from 1998 to 1999, Sun Microsystems from 1998 to 1999,
Qualcomm in 1999, eBay from 2002 to 2004, Google from 2004 to 2007,
and Apple from 2004 to 2007—were the number one companies in their
industry space at the time I purchased them.
By number one, I don’t mean the largest company or the one with the
most recognized brand name. I mean the one with the best quarterly and
annual earnings growth, the highest return on equity, the widest profit mar-
gins, the strongest sales growth, and the most dynamic stock-price action.
This type of company will also have a unique and superior product or ser-
vice and be gaining market share from its older, less-innovative competitors.

Avoid Sympathy Stocks, Buy New Innovative Leaders
Our studies show that very little in the stock market is really new; history
just keeps repeating itself.
When I first bought stock in Syntex, the developer of the birth-control
pill, in July 1963 off a high, tight flag pattern (and it then rapidly shot up
400%), most people wouldn’t touch it. The stock had just made a new price
high at $100 on the American Stock Exchange, and its price plus its P/E
ratio, 45, made it seem too high and scary. No brokerage firms had research
reports on it then, and the only mutual fund that owned it—a Value Line
fund—had sold it the prior quarter when it began moving up. Instead, sev-
eral Wall Street investment firms later recommended G. D. Searle as a
“sympathy play.” Searle had a product similar to Syntex’s, and its stock
looked much cheaper because it hadn’t gone up as much. But its stock failed
to produce the same results. Syntex was the leader; Searle the laggard.
A sympathy play is a stock in the same industry group that is bought in the
hope that the luster of the real leader will rub off on it. But the profits of
such companies usually pale in comparison. The stocks will eventually try to
move up “in sympathy” with the leader, but they never do as well.
In 1970, Levitz Furniture, the leader in the then-new warehouse busi-
ness, became an electrifying market winner. Wickes Corp. copied Levitz,
and many people bought its shares because they were “cheaper,” but Wickes