The primary mantra of most growth stock investors is "Only buy shares of companies with rising earnings." The second rule is, "Sell at the first hint of decelerating or, heaven forbid, negative growth."
Upscale manufacturers Coach (COH) and Tiffany (TIF) have done much better than the average company in both EPS and overall share price movement over the past decade. If you followed rules #1 and #2 as listed above, though, your investment results probably weren't all that good.
How could that have happened?
First let's confirm how they performed as companies.
Tiffany's did well. Coach was absolutely superb. If you lost money trading these two it wasn't because the underlying businesses did badly.
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COH shares rocketed from (a split-adjusted) $8.06 on Aug. 28, 2002 to $55.92 on Aug. 28, 2012. That's 593.8% plus dividends (which COH initiated during 2009).
TIF's share price pretty much mimicked its fundamentals. TIF grew from $24.24 to $62.71 over that same time period. That's 158.7% plus dividends. Quarterly payouts were paid and increased each year.
How did following classic growth stock investment principles kill your results? Those 2002-2012 charts took out the annual earnings fluctuations. Coach had uninterrupted earnings increases in every year from fiscal 2002 through FY 2008 (ended June 30, 2008). By the time you realized that COH's EPS growth streak was ending the stock had already cratered. It fell to $13.20 in late 2008 on the way to a final sickening low of $11.40 in early 2009.
Those who waited to see the first couple of negative quarterly comparisons gave back years of gains before bailing. The first nice year-over-year number didn't occur until the December 2010 quarter. By February 1, 2010 COH had already more than tripled off its low to $35.27. Waiting until growth was confirmed again before buying back in meant missing a more than 200% rebound.
That 78.9% share price decline ($54.00 to $11.40) came on a dip of just 7.3% in EPS. Mechanical rules often torpedo portfolio performance. Coach shares climbed to $79.70 early this year only to sink back to $48.24. There hasn't been another negative comparison since calendar 2009. COH closed Monday at $55.92 - up 15.9% off that very recent low.
Many Tiffany shareholders did worse than what happened to owners of Coach. EPS dipped slightly from FY 2003 to 2004 and flattened from FY 2007 to 2008. If you exited whenever growth disappeared you would have sold on both occasions. You might then have bought back in during 2005 when earnings improved from $1.42 to $1.75. Throwing in the towel near the bottom in 2008-09 could have meant losses, even if you had held continuously since 2002.
Awaiting confirmation of positive year-over-year earnings comparisons meant missing a move from the $16.70 absolute nadir to over $50. TIF shares topped out at $84.50 last summer when all the news was good. They got as low as $49.72 just weeks ago before rallying Monday to close at $62.71. That's better than a 26% bounce; right after reporting the third straight quarter of negative comps.
Since everybody knew the comparison would be bad it had already been more than priced in. Tiffany management indicated a new guidance of $3.55 - $3.70 for the FY ending January 31, 2013. Anything above $3.61 per share would be a new all-time record.
Throw out the investment rulebook. Simply buy good companies when the news is temporarily disappointing. That way your portfolio can outperform as much as the companies you're investing in are doing.