A Leading Growth Investor Is Selling Tech. Should You?

Regardless of what you think of him, his newsletters, or his track record, Louis Navellier has in many ways become the face of growth investing. He's frequently on CNBC and other financial news shows talking tech and high-growth opportunities, usually with a bullish bent.

This, after all, is the man who wrote The Little Book That Makes You Rich, an overview of the eight numerical criteria Navellier uses to select outstanding growth stocks -- a formula that, according the book and the performance page for his company's newsletters, has helped him achieve a life of remarkable wealth.

Magic 8-Ball says, "Don't count it."
Despite all that, a Bloomberg analysis of real-money moves made by his Reno, Nevada firm shows that Navellier is turning tail on some of tech's best-known growth names:

Source: Bloomberg. *As of the date of this report: August 5, 2011.

Should tech investors be concerned? I don't think so. Navellier never claims to be a market timer in The Little Book That Makes You Rich. Rather, his key principles are either based on or derived from fundamental measures of earnings quality. He's looking for earnings revisions, accelerating revenue and profit growth, strong cash flow, high returns on equity, and related metrics.

He also watches for a history of positive earnings surprises, an approach my Motley Fool Rule Breakers colleague Rick Munarriz also espouses, on the theory that surprising growth will drive Big Money interest and corresponding stock gains.

Pay attention to this metric
Momentum matters, no doubt. Yet I tend to pay closer attention to metrics that demonstrate management competence, such as return on capital. ROC measures how effectively executives deploy debt and equity in generating growth.

Why does it matter? Accelerating gains in ROC typically reflect higher operating margins and thereby higher operating income, cash flow, and (of course) stock returns. Just ask Rackspace Hosting (NYS: RAX) shareholders -- they've enjoyed about a double over the past year as returns on capital widened from 10.9% to 14.4%.

Of Navellier's top 10 sales, only Chipotle and salesforce.com have suffered year-over-year declines in ROC in recent quarters. IBM reversed declines three quarters ago and hasn't looked back since. Cognizant Technology Solutions started a trend of its own two quarters ago, while Baidu has grown ROC as consistently as revenue and now earns more than $0.43 on every dollar of capital it deploys. I dare you to name a tech company that's performed better.

The Foolish bottom line
So while I can appreciate Navellier's approach and history, I'm not buying his sales. In particular, I think now is an awful time to sell Baidu -- and not just because of its rising ROC. There are whole host of other reasons, as Motley Fool Global Gains co-advisor and one-time Baidu skeptic Tim Hanson explains here.

In fact, there isn't a single tech stock on this list I'd sell right now. The same goes for Chipotle, which we own in my wife's IRA. There's either too much growth opportunity left (e.g., salesforce.com, F5) or too much of a track record (e.g., IBM, Baidu, Citrix) to sell when Mr. Market is bingeing on crazy like he is now.

Do you agree? Disagree? Weigh in using the comments box below. And if you're in the mood for more stock ideas, try this free video. You'll walk away with a better understanding of a new computing revolution that's reshaping industries as well as a winning pick from our Motley Fool Rule Breakers scorecard. Click here to start watching -- it's 100% free.

At the time thisarticle was published Fool contributorTim Beyersis a member of theMotley Fool Rule Breakersstock-picking team. He owned shares of Chipotle and IBM at the time of publication. Check out Tim'sportfolio holdingsandFoolish writings, or connect with him onGoogle+or Twitter, where he goes by@milehighfool. You can also get his insightsdelivered directly to your RSS reader.The Motley Fool owns shares of Chipotle Mexican Grill and IBM.Motley Fool newsletter serviceshave recommended buying shares of Chipotle Mexican Grill, Baidu, Rackspace Hosting, and salesforce.com.Motley Fool newsletter serviceshave recommended creating an iron condor position in Chipotle Mexican Grill, as well as shorting salesforce.com. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. As you may have noticed, The Motley Fool'sdisclosure policymeans business.

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