“I Don’t Care What You Buy — Just Spend the Money!”
My neighbor works for one of the largest growth stock companies on the market right now.
This past weekend, he and his family walked over to cook some s’mores in our fire pit. As the kids played, we talked about life, family, and a little about business.
“We’re coming into the end of the year, and my team is right on budget. Unfortunately, if it stays that way, my boss is going to kill me!”
Jim is a straight-laced veteran. And from what I gathered, he ran his team the same way you would run a marine platoon: By the Book!
But that’s not the way things work at many of America’s biggest companies. And today, I want to explain why this should matter A LOT to you as an investor…
Please, Just Say What You Mean!
As crazy as it might sound, Jim’s problem is that his division simply hasn’t spent enough money.
Yes, they’re set to hit the exact budget that was planned at the beginning of the year. But the unwritten rule at this company is to spend five percentage points more than your budget.
We’re talking about millions of dollars just for this one department. And certainly billions of dollars for the entire company over the period of just a year.
“The idea is that our company wants to spare no expense when it comes to growing our business. So they don’t want us to be frugal if that means we might grow at a slower pace.”
“But in my department this makes absolutely no sense! Our spending has nothing to do with the company’s growth. Instead, my boss is worried that if we don’t spend more than our budget, the company will cut his budget next year.”
Talk about wastefulness!
This giant growth company — a stock that you would definitely recognize if I told you the name — has a spending problem that is widespread throughout the company!
It’s sad to think that with just a bit more common sense, these growth companies could lock in much more in earnings, simply by being smart with their incentives.
But instead, managers from the highest levels, all the way down to hourly employees, are expected to spend whatever is necessary (and sometimes what isn’t necessary) day in and day out.
Would YOU want to invest in this company?
Well out of respect for my neighbor’s privacy, I can’t tell you which company it is. But I can tell you that if you invested in the S&P 500 index, a significant portion of your capital would go directly into this stock.
This expense problem is one of the reasons I’m not a big fan of investing in big “FANG” growth stocks like Facebook, Amazon, Netflix and Google.
And over the last few weeks, we’ve started to see other big investors rotate out of these names and into companies that have a little more common sense when running their businesses.
Value Stocks Are Once Again in Vogue
For what seems like an eternity, growth stocks have ruled Wall Street.
Investors from the most seasoned pro, to individuals buying shares for their retirement accounts, have favored companies that are growing quickly and sparing no expense.
In many cases, companies with absolutely no profit (and sometimes no immediate plans for profit) have traded at much higher values than established firms with decades of reliable profits.
This makes sense during certain economic periods.
At the beginning of a growth boom, it makes sense to pay a premium price for these growth companies. If they wind up being successful, the growth will more than offset the extra cash you spent on the shares to begin with.
But today, the economic climate is shifting.
Sure, the economy is still growing. And I’m still very bullish on America.
But investors are shifting their focus from “growth at any cost” to “profits at a reasonable price.”
And that’s great news for smart investors like you!
Because as investors start to sell these high growth companies that spend money without any rhyme or reason, and these same investors start buying shares of companies that generate reliable profits, you’ll be in a perfect spot to profit!
Most of the stocks that we focus on here at The Daily Edge are companies that not only grind out profits quarter after quarter, but they also pay reliable dividends!
This is a great way to accumulate wealth. Not only can you watch the value of your shares trade higher as more investors start buying these value plays, but you’ll also get paid regular dividends which can be used to cover life expenses or even buy new shares!
In short, we may see more challenges ahead for big-spending growth stocks. But our value plays and dividend stocks should continue to be great places for us to invest!
Here’s to growing and protecting your wealth!