How to add some security to your growth stock portfolio

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Michael Fowlkes 02/24/2014

The current earnings season is quickly coming to an end, and overall, the earnings reports have been positive, but there has been concern over the number of companies that have issued worse than expected forward guidance.

According to FactSet Research , through February 21, out of the 442 companies in the S&P 500 that have already reported, 72% have reported better than expected quarterly results, and 65% have reported better than expected sales.

With the high number of companies besting analyst estimates for their most recent quarter, it is easy to understand why the market was able to move higher in February, but everything is not as pretty as it appears on the surface.

As FactSet reports, looking ahead, 92 of these same companies have issued earnings guidance, and 75 of these issued negative forward guidance, with just 17 issuing positive EPS guidance. This translates to an 82% of companies issuing negative guidance.

With the high percentage of companies issuing negative guidance, perhaps the safest way to get involved in the market is with growth stocks. These are companies that have a history of solid earnings growth as well as expected growth in the future. These companies tend to be more stable, and a great way to invest during uncertain times, but of course there is no guarantee that these companies are going to outperform the market.

Let's take a look at two different growth stocks to illustrate that point.

One of the bigger growth stocks to report earnings over the last week was Coca-Cola ( KO ). The soft drink giant reported its fourth quarter results on February 18, and Wall Street was not impressed.

Coke reported weaker than expected global sales growth, and a decline in the U.S., where consumers continue to shift away from sugary soft drinks. Quarterly revenue dipped 3.6%, and came in below the consensus estimate. However, quarterly earnings of 46 cents per share were in-line with analyst estimates. Wall Street took a bearish stance on the stock following its report, and the stock dropped 3.8% on the day of the news.

Another big name growth stock to recently report quarterly results is electric car manufacturer Tesla ( TSLA ). The company reported its fourth quarter results on February 19, and easily bested analyst expectations for its recent quarter. Quarterly earnings were $0.14 per share, $0.10 higher than expected, and revenues of $761 million were well above the $713.5 million analysts had forecast.

The better than expected results sent the stock soaring, gaining 8.5% the day after the earnings were released.

Just like every segment of the stock market, there are going to be some winners and some losers among growth stocks, but overall, I believe they are a safe way to invest at the current time. However, with the high level of negative EPS guidance we have seen, I prefer to take a diversified, hedged approach to the market.

One way to invest in growth stocks is with the Vanguard Growth ETF ( VUG ). This exchange-traded fund is set up to track the performance of the CRSP US Large Cap Growth Index, a benchmark that measures the return of large cap growth stocks.


Chart courtesy of stockcharts.com

Year to date, VUG has gained 1.4%, which compares favorably to the Dow Jones, which is down 2.5%, and the S&P 500, which is down 0.3%, though it trails the NASDAQ, which is up 2.4%.

Among the top holdings of VUG are Apple ( AAPL ), Google ( GOOG ), Coca-Cola, Gilead Sciences (GILD) and Philip Morris (PM). As you can see by the above list, its holdings are diversified, so you are not exposed too much to any one sector of the market.

A nice hedged trade on VUG would be the June 83/88 bull put credit spread. In this trade, you would sell the June 88 put while buying the same number of June 83 puts for a credit of 35 cents. This trade has a target return of 7.5%, which is 22.9% on an annualized basis (for comparison purposes only). With VUG trading at $94.34, this trade has built in 6.3% downside protection.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: KO , TSLA , VUG , AAPL , GOOG

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