I have written up eight companies that have a chance to be among the top 25 stocks for the NEXT 25 years and I thought it might be time for some discussion. You, the readers have sent in quite a bit of responses to the first six names. Most of your responses have been very positive and I certainly appreciate it. But many of you have been raising questions that I believe need a general response.
Let's put a few ideas and myths to rest once and for all.
The top 25 for the NEXT 25 years are bound to be smaller capitalization companies. By definition, they have to be. I recommend a number of companies on my website that are of a larger capitalization, but to make the list, the law of large numbers is against the larger cap names. If a $20 billion market cap names five folds over the next 10 years, that's a great return and no one should be unhappy. But if a $500 million market cap name goes to $20 billion in value, that's a 40 times return. So, the names will be of a smaller cap nature.
With high-growth companies early in their development, don't get hung up on lack of dividends. High growth companies do not pay dividends, nor should they. You want every penny of after-tax earnings to be plowed back into the business. Mature companies tend to pay cash dividends because their growth rates have slowed, the business lines are well-funded, and the excess cash is returned to shareholders. The downfall is that the stocks will not grow as fast in value as a high-growth company that is executing well. The big joke among portfolio managers when Microsoft Corp. (NASDAQ: MSFT) declared its one time $3 dividend and initiated a quarterly dividend was that the party was over! When is the funeral? Microsoft was signaling that the high-growth, plow the earnings back into the business era was over. The stock traded sideways for nearly three years as Microsoft tried to get its footing back.
PE ratios -- yes sometimes they are meaningless. During the great growth phase of Microsoft, Oracle Corp. (NASDAQ: ORCL), Cisco Systems (NASDAQ: CSCO), and Dell Inc. (NASDAQ: DELL), the PEs were frightening. If an investor held firm to a PE ratio range, that investor would never had owned any of these great performers. During the high-growth phase, top-line growth is among the most important barometers, as is sequential quarter-to-quarter revenue growth, margins holding or expanding, etc. A PE ratio becomes important when a company like Microsoft initiates a dividend! Seriously, when a company hits a "maturity" stage, a PE ratio becomes more relevant and important in the analysis. One name I wrote about, Salesforce.com (NYSE: CRM), has a PE measured in the thousands. It's a subscriber-add story and sequential revenue story: that's how the Street values it ... one day the PE will be relevant.
With many of these names you may think: "I've never heard of this company before!" That's right. Many small, emerging growth companies are not yet mainstream, so name recognition is an issue. But don't fear; I am researching these companies extensively! Many companies for the NEXT 25 years will be in industries that do not have a direct consumer line of business. However, some you will have heard of, like California Pizza Kitchen (NASDAQ: CPKI) or Crocs Inc. (NASDAQ: CROX), and a few more to come. Stay tuned.
One last thing: I was asked is why am I capitalizing the entire word next? Just to get and retain your attention. Heck, this is a lot of work, but a lot of fun! Please keep sending me your own ideas ... we still have 17 names to go.
Georges Yared is the CIO of Yared Investment Research. For more growth stock ideas, besides the Top 25 for the NEXT 25 years, please visit the web site!