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Searching in Garages. The phenomenon of growth and glamour stocks is, not surprisingly, one of Fairchild's greatest interests. "Growth is an old story to me," he says. "I've been a stockholder in IBM all my life. A growth situation gets down to the question of an analysis of human needs. People are getting more money and more leisure time continually. To offset the cost of this, we are increasing our human efficiency to pay ourselves added benefits. That is the kind of business, for example, that IBM is in—enabling people to do more so that they can have more rewards from life."
To thousands of investors from Wall Street to Walla Walla, the way to get the rewards—in the bank account—is to find another IBM, Fairchild Camera, Polaroid or Texas Instruments to invest in. Across the U.S. roam sharp-eyed stock analysts searching out their quarry in the laboratories of big corporations, where a new product might mean a new industry, in dilapidated factories, where old businesses may transform themselves with new ideas, or in cellars and converted garages, where a new business may have just been born. The happy hunting ground of the new firms is the over-the-counter market, home of unlisted stocks, where buying is often far riskier than in the more ordered world of the listed exchanges, with their careful records of earnings and dividends. Most of the new companies float only a small amount of stock, keep a hefty nest egg of unissued stock to finance future growth and protect their own interests in the company. Thus, when investors find a promising new infant, the scramble to fondle it often brings fantastic results. Example: New Orleans' Kalvar Corp., which started in a garage, sold 75,000 shares of stock at $20 a share four years ago. Last week it was selling at $300 a share, though the company has never earned a penny. Investors bought because a handful of big corporations are working to develop a new copying device using a film process developed by Kalvar.
What is a growth stock? To the unsophisticated, it is simply a company whose stock goes up fast. Wall Street has more precise definitions. Samuel Stedman of Loeb. Rhoades & Co., the high priest of the growth cult, believes that a growth stock's per share earnings must grow at least 12% to 15% compounded annually.
If its earnings are compounded at 25%, it will double in three years. From this definition arise some complicated formulas. If stock in a company .growing at 25%, for example, now makes $3 a share and sells for eleven times earnings, it will cost $33 now, should be worth at least $66 in three years. But many analysts think that a stock growing at 25% should sell for more than 30 times earnings—which would make today's $33 stock really "worth" $90 now and $180 in three years. Result: the smart investor is willing to pay far more than $33 today in hopes that it will be worth $180 in three years. Other brokerage houses have their own formulas to justify the high price of growth stocks. But most agree on broad definition: a growth stock is a stock of a company in an industry that is growing faster than the economy (now a 4% increase yearly), and which itself is growing faster than the industry.