Course 402: Morningstar's Stock Types
Let's Make a Distinction
In this course
1 Introduction
2 Let's Make a Distinction
3 So You Want to Build a Portfolio?
4 I Own What?

Savvy investors know about the corporate life cycle: Companies in their startup phase lose money; if they're successful, though, they enter a rapid growth period, where sales--and eventually profits--shoot upward. Then, alas, comes the point when the company has exhausted all of the easy growth opportunities. The low-hanging fruit has been picked. The company enters a mature phase in which sales may be growing, but at a much slower rate than before. Finally, in a company's dotage, it's all management can do to grow the company at all. The company's either in stagnation or outright decline. Our stock types help you pinpoint where a company is in the life cycle. Let's look at semiconductors. What's the key difference between chipmakers Intel INTC and National Semiconductor NSM? Or between Broadcom BRCM and Rambus RMBS? One of the babies of the industry is Rambus, a company that makes devices to speed up computer processing. The company's sales have grown rapidly, though inconsistently. Earnings have been even spottier. Rambus has actually lost money over the past five years in aggregate. It is a great example of a speculative-growth company. Moving up the maturity scale a notch we find Broadcom, a company about 10 times the size of tiny Rambus. The company specializes in chips that enable broadband data communication. Broadcom's sales have grown rapidly, and although it has had one money-losing year over the past five years ending in 1999, it's generally increased its earnings in line with sales. That's the sign of an aggressive-growth company: one that has managed to increase both sales and profits at a rapid clip. Now we come to companies like industry leader Intel. Not too long ago, Intel landed in the aggressive-growth group along with firms like Broadcom, but because of slowing growth, Intel has mellowed into a classic-growth company. Despite the snags of late, Intel has a record of good sales growth and consistently positive earnings. That's the mark of a classic-growth firm. Don't expect them to grow sales by double digits every year, but do expect them to generate solid profits--and maybe even pay out a good dividend. Even more mature than Intel is Texas Instruments TXN. The company was busy restructuring itself in the late 1990s and has been shrinking as a result. The company's trailing three-year sales growth at the end of 1999 was negative, and earnings have bounced all over the place. Texas Instruments merits a slow-growth tag because of this rather unspectacular record. The trials at Texas Instruments, however, are nothing like those at chipmaker National Semiconductor. The company's sales and cash flows have fallen, and the firm has lost money as a result. The situation is bad enough to land National Semiconductor in the distressed stock type--the nether-zone in which we place firms with a history of serious operating problems. These are typically companies that have run into growth problems, either because the market is saturated or because competitors have the upper hand.

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