A Skeptical Look at Three Secular Growth Companies (GOOG, AAPL, WFMI)

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Includes: AAPL, GOOG, WFM
by: The Stalwart

The Stalwart submits: Barry Ritholtz found a good chart yesterday showing that the S&P's recent low and subsequent rally conforms nicely to the general trend of the index over the last three years. In his entry, he speculates that we are in the midst of a meaningful sector rotation from energy/housing back to traditional market-leaders like tech. Of course only time will tell if this is true, or if this is just a head-fake.

Other than the energy/housing issues there's one other theme that investors have liked: guaranteed growth. These are the companies that are unique, and whose growth is so secular that issues such as the economy, inflation, oil, etc. aren't seen as impediments to higher earnings. Three notable examples in this category are Google (GOOG), Apple (AAPL) and Whole Foods (WFMI). All three of these stocks have had outstanding runs, trouncing both their industries and the broader averages.

Now if you look through our archives you'll see we've voiced skepticism about the valuations of each one of these companies, and in terms of timing our skepticism has been flat out wrong. But that doesn't mean our arguments were off, or that their decline aren't around the corner. If oil continues to recede, investors may feel comfortable spreading their bets to a wider variety of companies, not just the ones with unusual secular growth stories.

Already, Google has come off its highs, going against the market, and Whole Foods' quarterly report wasn't particularly inspiring. They announced a large one-time dividend and increased share buy-backs, not exactly characteristic of a high-capex growth-retailer. Furthermore, investors may find it awfully hard to justify a forward PE of over 50 for a company projecting annual growth of just 20%. The stock was down over 4% after hours yesterday.

So while oil's decline might help ease the pressure on many companies, it could signal the end of the Growth At Any Price play. Or it may not, but it's still worth thinking about.

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