These Growth Stocks Are Looking Up

Slow on the uptake

That delayed reaction is nothing new for growth stocks. When the recession first hit,
many high-growth companies didn't immediately face up to the prospects
of falling earnings and revenue growth rates. Given the way their
stocks had performed throughout the previous bull market, investors
hoped that those companies would stay resilient and buck the trend with sustained growth.
As a result, it was easy to stay in a state of denial about just how
bad the market meltdown would be -- at least until companies started
reporting actual results that shellshocked shareholders simply couldn't ignore.

Similarly, after the market's lows in March, investors weren't
necessarily in any hurry to think about an earnings recovery, even as
share prices started to rebound quickly. Having gotten burned by
companies that didn't hold up as well during the recession as they had
hoped, investors were conservative in their expectations.

Now that many companies have reported a couple of quarters of decent
results, however, analysts are finally getting around to marking up
their guesses on future earnings. Just take a look at how much forward
estimates for some companies have risen in just the past 90 days:

Source: Yahoo! Finance. Forward estimates are for the next fiscal year.

In most of these cases, rising estimates are only putting these
companies' profits back in line with their longer-term expected trends.
Notice how their expected near-term earnings growth now compares with
five-year estimates:

Source: Yahoo! Finance.

You can see how with the exception of BHP Billiton, which analysts apparently see more as a cyclical play on commodities
than as a true growth stock, most of these stocks have a similar
appearance here. Only now that analysts have boosted their earnings
estimates do these stocks have a chance to offer growth rates for next
year that match up at least fairly closely with their long-term
earnings growth.

That helps to explain why many of these stocks have rallied this
year. During the worst of the crisis, no one knew if a struggling
economy would knock growth stocks off their upward trajectories
permanently. At least for now, though, analysts are treating 2008 as an
anomalous blip, forecasting a return to rosier times for these growth
stocks.

Keep your eyes open

The danger, though,
is that after a big run-up in the stock market, growth stocks now need
those rosy scenarios actually to play out. Now that expectations are
much higher, even a relatively small miss could send stocks over a
cliff fairly quickly. Moreover, given how notoriously inaccurate long-term earnings forecasts are, there's no guarantee that stocks can keep up this pace that long.

Rather than relying solely on Wall Street analysts, you should have
your own opinion of where you see a company's future earnings going.
That way, you'll know what you expect, and it'll be much
easier to decide what to do next based on how the future plays out for
these and the other growth stocks in your portfolio.

© 2009 UCLICK, L.L.C.