Prior to joining Gabelli, Howard spent 12 years, at Scudder, Stevens and Clark where he served as Managing Director and Product Leader of Scudders large capitalization growth product and lead portfolio manager of the Scudder Large Company Growth Fund and the Scudder Balanced Fund.

Prior to joining Scudder, Howard was with Brown Brothers, Harriman & Co. for four years where he held the title of Investment Officer in the firm's Institutional Investment Department.

Howard is a Chartered Financial Analyst and a member of the New York Society of Security Analysts. He graduated from Northwestern University in 1978 with a BA in Economics.

Seduced by Growth Stocks
Investors in growth stocks are feeling pretty smart these days. This is especially true for investors in large growth companies that play vital roles in the new information age economy. Those with the foresight to buy and hold some of these rocket ships over the past few years have seen their original investments multiply several times. The list of winners reads like a Who's Who of The Information Highway. There's Cisco Systems, whose routers direct traffic over the Internet. There's Sun Microsystems, whose client server computers have become the hardware of choice for Internet Service Providers. There's EMC, the leader in data storage products, where the Net is driving high rates of growth ever higher. Other power stocks include Texas Instruments, the top producer of Digital Signal Processors (DSPs), which are increasingly in demand for use in a broad range of communication devices. Widely recognized brands like Dell, IBM, Microsoft, Intel and Lucent have delivered in a big way too, as have others.

Growth stocks, of course, are supposed to grow their earnings year in and year out. As growth rates rise, the compounding of earnings becomes all the more powerful. A company growing earnings at a 7% rate (pretty average) doubles its income every 10 years. But a company that grows profits at a 14% rate doubles those profits in 5 years. Further, a company growing at 25%, like some of these tech titans, doubles its earnings in less than 3 years. Companies that grow at healthy double digit rates make for great long term investments because that compounding of earnings will drive the stocks higher and higher as long as the economic background remains stock friendly (a potentially dangerous assumption). On Wall Street, analysts prize high growth companies and reward them with relatively high valuations. Sometimes these valuations become too high. Yes, you can overpay for these Wall Street "darlings" and get burned.

Did Someone Say "Irrational Exuberance"?
Back in 1974, when OPEC got serious about raising the price of oil, the great bull market in growth stocks known as the Nifty Fifty Era came to an end. Some Blue Chip stocks lost over 90% of their value in the ensuing 12 months. This took a toll on investor psychology and helped keep investor expectations in check for years. Of course, few of today's investors experienced the pain of 1974. In today's stock market environment, risk has largely been rewarded, encouraging investors to speculate on many immature ventures that will fail. Such forms of investor behavior are worrisome and makes one wonder if the stock market in general and growth stock darlings in particular need a rest. Indeed, we have seen pockets of "irrational exuberance", to use Greenspan speak, especially among the Internet stocks. The Internet sector of the stock market, comprised of emerging growth companies as opposed to the established or seasoned growth companies we favor, seems to have peaked in April, with many of these stocks losing over half of their value since. One Internet favorite, America Online, traded as high as $175 per share in April, only to fall to $81 by mid-September, losing about $90 billion of market capitalization. That amount exceeds the entire stock market value of General Motors by a factor of 2. Don't let anyone tell you that valuations don't matter.

What Ever Happened to Dividends?
While many of today's growth stock leaders pay no dividend, that has not always been the case. In fact, dividends were essential to early growth stock advocates, in the 1930s, because they viewed growth stocks as a way to rapidly grow their investment income.

To the extent that companies grew dividends in-line with rapidly rising earnings, growth stocks would produce a generously growing income stream. Today's growth stock leaders need to retain earnings to finance rapid growth. Paying dividends might signal a slowdown in the rate of growth. This might actually hurt a growth stock's share price. Moreover, our tax code penalizes companies for paying dividends. Shareholders have to pay taxes on them despite the fact that the earnings they represent were already taxed once at the corporate level. Management and shareholders are increasingly tax sensitive as they should be. When companies reinvest earnings for growth or use retained earnings to buy back stock then no tax is due. With or without dividends, investing in growth stocks for the long term is an investment style that has stood the test of time. Paying an economic price for companies growing at above average rates is a winning strategy. Over a period of years it is the earnings growth that drives the share prices ever higher, all else being equal. Of course, it is important to know where a company is in its life cycle.

As companies age they move through four distinct phases. The first stage is the early venture capital stage when a company is just getting started. Many companies don't survive beyond this stage. Next comes the emerging growth period which is typically launched with an Initial Public Offering. At this point what was a venture capital idea has become a viable business. New public companies are usually showing good growth off of a relatively small revenue and earnings base, but risks remain substantial. Many of these companies are dependent on a limited menu of products and a small customer base.

Many things can go wrong. Some companies just can't manage their growth well and fall by the wayside. Those that survive this phase go on to become established growth companies. These are muscular enterprises that have that rare ability to grow their earnings even when the overall economy is flagging. These are the growth stocks that Wall Street is having a romance with. These are the "darlings". Depending on the nature of a company's business, among other things, this phase could last for a brief spell or for many years or decades. When growth ultimately slows, companies enter their final phase, which is the mature stage of life. A steel company would be representative of a company in this category.

Getting The Upper Hand
The best growth stocks possess one or more competitive advantages. Examples of such would be proprietary products, exemplified by patented drug or high technology products. Think Amgen. Think Intel. A dominant brand can be a competitive advantage, just ask Coca-Cola or Gillette. Perhaps more timely, think Microsoft or Dell. Some companies have a limited degree of competition and that's a special form of competitive advantage. This could be the result of massive capital and intellectual barriers to entry, regulation or years of industry consolidation. There is only so much broadcasting spectrum available. There are only so many cable television operators and they each have virtual monopolies. Good luck displacing Intel. Advanced Micro Devices keeps trying and failing. You may have a better tasting cola than Coke but shelf space is hard to come by and the established giants, like Coke and Pepsi, will fight to keep you out of the game. You get the picture. It's hard breaking into the major leagues.

Don't forget to examine the talent at the top of the organization chart. The Chief Executive Officer sets the agenda and leads the troops. He strongly influences the corporate culture. Wall Street can get so caught up in the numbers that it misses the forest for the trees. Ask IBM shareholders if Lou Gerstner has made a difference. Ask AT&T shareholders if C. Michael Armstrong is making a difference. Apple Computer with Steve Jobs is a different company than Apple Computer without Steve Jobs. Would Microsoft be Microsoft without the genius and competitive drive of Bill Gates? Bernie Marcus was Home Depot. Mel Karmazin is CBS. Sumner Redstone is Viacom. Scott McNealy is the image of Sun Microsystems. Top corporate leaders make a ton of money these days (sometimes too much) because they can make the difference between success and failure. Bankers are right. Character counts.

Listen To The Salmon
While a company's competitive advantages are central to establishing its growth stock credentials, so too is how the company is positioned relative to major socio-economic trends. If the world is changing to your benefit, you may enjoy the experience of swimming downstream. It clearly beats swimming upstream as any salmon will tell you. The aging of the population, the information revolution and economic globalization are three trends which influence our investment decisions. Companies in the cross hairs of these trends have little to fear. The aging of the baby boom generation in America, Japan and Europe has implications for how we spend our time and money. We need more healthcare and financial services. The lack of growth in the labor pool results in more substitution of capital for labor as we are forced to improve productivity. This usually means we spend more on technology.

The days when growth stock investors could ignore those volatile technology stocks are over. In case you haven't noticed, most of the new jobs created in this country recently are in the information technology sphere of the economy. Technological advances in hardware, software and telecommunications are changing the way we work, play and communicate. The Internet is The Information Highway. It is an agent of change. The companies building the new technologies are at the center of this new economy. Companies that are leading this revolution are experiencing turbo-charged growth. These are Cisco Systems, Sun Microsystems and EMC, among others. Companies that are using new technology to improve the productivity of their businesses gain too. These include drug companies like Pfizer and Merck, financial service companies like State Street Boston and Charles Schwab, media companies like Time Warner and Viacom and communication companies like AT&T and MCIWorldcom.

Thanks to modern communications and management tools and a world economy based more and more on capitalism, we have an increasingly global economy. About 95% of the people on this planet do not live in the United States. Many new markets have opened for multi-national companies to exploit. Globally, we see strong demand for western technology, pharmaceuticals, airplanes, movies, fast foods, consumer brands, capital goods and even our capital. Sure, companies that do business throughout the world will encounter bumps in the road from time to time but the long -term payoff should compensate for the headaches. To be sure, American or western products are not in demand absolutely everywhere and establishing a presence in some locales is costly in the short run. However, the markets are vast and represent major opportunities for the companies that master the complexities and stick it out. Ask IBM, Intel, or Microsoft what their earnings would be if they only did business in the States. Ask the drug companies. Ask Time Warner how much profit they make from the overseas distribution of films and music. Big companies want and need big playing fields.

Can't Live Without Them
We don't know how long America's love affair with large company growth stocks will last. The past five years were richly rewarding, but are 20% to 30% annual returns really sustainable? At some point the largest stock market gains may be generated by stocks that don't neatly fit in the large cap growth box. Investors in value, foreign or small companies may be the ones feeling smart twelve months hence. Stock market history suggests there is a cyclicality to returns by investment style which seems undeniable. That said, if the economic background for stocks remains favorable and the earnings of many of these companies continue to grow at 20% to 30% rates, then investors in these stocks are likely to reap additional rewards. Common sense seems to dictate that you should have some portion of your portfolio in these celebrity stocks. Ignore them at your peril. To own them is to love them.

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