What has his firm T.Rowe Price bought in India? Companies like Mid-Day multimedia, TV –18 & Financial Technologies

A specialist in growth investing. T. Rowe. Price ushered in a new phase of growth investing just as Graham had done for value investing. While analysts and fund managers at leading research houses were busy looking for that turn around spinning company or that Steel company that was restructuring its debt, Rowe looked at companies that were in the secular growth phase. The process started with identifying the sectors in that growth phase and then buying the most promising company in that sector

Key learning:

What to look for before buying?

• The most profitable and least risky time to own a stock is during the early stages of growth. Mature companies offer less returns compared to their risk.
• Check whether companies have superior research to develop products. Invest in companies operating in niche sectors.
• Buy companies that are generally immune to changes in Govt. Legislation.
• Avoid investing into companies having substantial or spiraling labor costs.
• Look for companies having a high Return on Capital employed (ROCE), High operating margin, and sustained growth in earnings per share (EPS)
• The company should exhibit growth both from the both volume as well as the net earnings side. The growth in sales value is not that important as the growth in unit volume.
• Companies having the following attributes were expected to prolong their superiority.
  • Superior Management
  • Patents and Research capabilities
  • Strong Finances

What to look for before selling?

• Reduced entry barriers giving rise to competition.
• Saturating markets. Once the market became saturated it was time to get out. 
• Adverse change in Management integrity.
• Adverse changes in legislative or legal scenario.
• Rise in input costs.

Selling Strategy:

Price waited for the stock to go up 30% before he decided to sell then sold another 10% as it went up by 10%. Thus at some point of time he would be out of the stock. Quite a contrast to Fisher who wanted to hold on to a growth stock till eternity.

Rowe disliked dividend discount valuation models employed by Wall Street analysts. He thought that estimating the future on that basis was based more on theory rather then reality. Rowe opined that the changing dynamics of the business environment would not enable the dividend discount model to throw up correct valuations. 

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