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Take a Look at Newcomers

May 29, 2005|Tom Petruno | Times Staff Writer

Stick with the old names, or focus on new ones?

That's the key question for many investment advisors as they survey the "growth" stock sector.

Nobody doubts that the late-1990s growth stock leaders are cheaper than they were in their heyday, in terms of price-to-earnings ratios, for example. But that's for good reason, in many cases: The companies and their businesses are mature or at least maturing. Wall Street usually pays less for those kinds of stocks than for younger companies with more robust long-term growth prospects.

Pat Dorsey, director of stock research at Morningstar Inc. in Chicago, said there were bargains among some of the 1990s growth stars. But he advises investors who are hunting for growth issues to also look at up-and-comers in industries that are far from mature and whose shares have been hit by recent profit taking.

He likes stocks of many for-profit higher education companies, such as Apollo Group Inc. SLM Corp., a provider of student loans once known as Sallie Mae, is another fast-growing company in that industry, Dorsey said.

His focus is on what he calls wide-moat growth businesses: "high-quality companies with durable competitive advantages." One advantage for higher education businesses, Dorsey said, is that strong demand for their services gives them healthy pricing power.

Other wide-moat growth names that he considers attractively priced include slot machine maker International Game Technology, online auction site EBay Inc. and premium liquor producer Diageo, Dorsey said.

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