Halfway Through the W?

What do growth stock investors buy when there’s no growth? They specialize in companies whose revenues and profits stand to grow at a faster rate than the rest of the market, but what happens during a recession, when consumers stop buying and top-line growth stalls?

Tom Kamp has some ideas. He’s the chief investment officer of Bloomington-based Cornerstone Capital Management, Inc. The firm itself is fast growing, having recently broken through the $1-billion-in-assets-under-management mark.

We’ve seen a 54 percent upward move in the market since the lows in March. Is this sustainable, or could we see the proverbial W-shaped market recovery, where we take another leg down before coming out of it?

Kamp: Virtually all professionals in the business believe that the market has come too far, too fast, and that we’re due for some sort of correction. Investors have ignored the trough of earnings weakness and are justifying today’s stock prices based on normalized earnings power, which we hope to get back to by 2011. As you’ll appreciate, that’s a dicey proposition, and if there’s any delay—bumps in the road where we don’t get there—it stands to reason that we could see quite a pullback in the market.

So what’s that say to equity investors? We’ve seen news reports that Warren Buffett himself is lightening up on stocks and buying bonds.

Kamp: What I gave you is the first half of the story. Here’s the second half of the story: We have $3.5 trillion in money market securities earning close to a zero return; approximately $1.2 trillion is from retail investors and the balance is institutional. Those assets are a huge source of liquidity, and when you combine that with the knowledge that the vast majority of hedge funds were improperly positioned for this most recent market rally, you can see that every time the market has started to pull back a little bit, boom, boom, boom—cash comes into the market. So while investors have expected a pullback on any sign of weakness, they’re ‘buying the dip.’ So the dip never materializes. I’ve never seen anything like this, to this magnitude: a 50 percent-plus run combined with very little volatility.

Are there particular areas for a growth stock investor to exploit? Earnings have been coming in pretty strong, but companies have been getting there on the basis of cost cutting, not revenue growth.