Navellier Growth: your source for market-beating growth stocks

Since this is a holiday-shortened week, I wanted to take this opportunity to answer some questions that many of my subscribers have been asking me. I love getting feedback from my readers and from investors I meet at my seminars. I want to remind you that you can sign up now for any of my four services: Blue Chip Growth, Emerging Growth, Global Growth or Quantum Growth.

Q. There is so much talk about the "crashing" of the U.S. economy in the media. I believe that inflation is actually far higher than the government says. What do you think is the truth given the weak dollar? Do you think a significant recession is nearly here?

Louis: Inflation is hideously high due to food and energy. The food inflation stems from the fact that we are putting corn in our gas tanks due to ethanol blending, so the costs for animal feed have risen and caused all food prices to rise. The energy inflation has not been as bad, since natural gas prices remain low. Furthermore, the prices at the gas pumps have not risen as much as the light/sweet crude oil quoted on CNBC, since North America runs predominately on cheaper heavy sour crude oil, and the price of ethanol has fallen in recent months. However, when the summer driving season approaches in March and demand picks up, gas prices could cross over $4 per gallon if oil prices remain high.

Our Fed ignores inflation from food and energy and tends to concentrate on "core" prices. Since core inflation is much better behaved, the Fed has plenty of room to cut interest rates. With the Fed aggressively easing, the risk of a recession is not high.

Just remember, the folks on CNBC like to scare people to boost their ratings. Frankly, I think that this is hurting their long-term viewership. The folks on Bloomberg and Fox Business News are much calmer and tend not to try to scare investors.

Q. Hi Louis, I know the end of the year is fast approaching. What is your forecast for 2008? Is there anything I should be doing to prepare my portfolio for the end of the year? I know in mutual fund investing, this period of time is known as distribution season. Is there anything I should watch out for as a stock investor? Love your newsletters—keep up the good work!

Louis: There is nothing that you have to worry about at the end of the year other than possibly doing some tax planning based on your unrealized gains and losses. Typically, investors try to defer their gains into the next year and realize any losses in the current year. The mutual fund tax year ended on October 31, so all the tax selling that mutual funds do every year has already happened.

Q. What is the GDP below which most economists define as a recession when it occurs for at least two consecutive quarters?

Louis: Two quarters of negative GDP growth defines a "recession." We are nowhere near a recession. The flash estimate of third-quarter GDP growth was 3.9% but will likely be revised up to approximately 5% annual growth due to the strongest productivity surge (to 4.9%) in 4 years, falling labor costs (down 0.2%) and booming September exports. The third-quarter GDP growth was the strongest in years. However, the GDP growth for the fourth, first and second quarters are expected to slow according to Fed Chairman Bernanke's testimony. This tells me that the Fed will likely be lowering interest rates for the next few months. I expect that by the time the November presidential elections near that the U.S. economy will be firing on all cylinders and growing at approximately a 5% annual pace.

Q. Louis, I'm in the process of reading your new book. You did an awesome job! It's very informative and has great real-life analogies that I truly appreciate. I'm bucketizing my stocks based on the 60/30/10 rule and have a question regarding the differences in PortfolioGrader Pro and your monthly Blue Chip Growth newsletter. For example, McDermott International (MDR) in the monthly newsletter is categorized in the aggressive area, yet in the stock picker it's moderately aggressive. Which one is right?

Louis: Great question. To answer your question, each newsletter sorts the stocks based on their underlying volatility. PortfolioGrader Pro rates stocks on the volatility of the up to 5,000 stocks in the database. As a result, a stock that is classified "Moderately Aggressive" in Blue Chip Growth might be classified as "Conservative" in PortfolioGrader Pro. In other words, the more volatile small-cap stocks in PortfolioGrader Pro tend to skew the risk classifications in the database.

Q. Hi Louis. Do you have a strategy on how to best expect or prepare for a market correction? Last year, we saw a correction around mid-May, and this year it started late-July, when the earnings season began. A lot of gains we had were wiped out. Every time, we wait for the earnings announcement to be the big catalyst, but this time earnings did not make any big movements. My question is, how do we protect profits? Should we start Dollar-Cost Averaging during corrections time?

Louis: In 2006, there was no doubt that many folks "sold in May and went away." This year, the market was hitting news highs through the spring, until it faltered in late-July. In August, the market repeatedly tried to "retest" its late July lows. All that is really happening is that the stock market is bouncing along the bottom.

Instead of Dollar-Cost Averaging, I believe the best way to protect your profits in turbulent markets is by making sure you're diversified and following my 60% Conservative, 30% Moderately Aggressive and 10% Aggressive recommended allocations.

The bottom line is, if I were a value manager with predominately financial stocks, I would be a wreck. But since I am a growth manager, I am not worried, since sales and earnings remain strong and P/E ratios remain at more than a decade low. Wall Street likes to shoot first and think second. This is not pleasant, but not uncommon. I expect that our stocks will recover very quickly since their earnings are far superior to the overall stock market.

Q. Can you explain why "value" stocks are getting hammered? What makes them so susceptible to downward movement in this market environment? Thank you.

Louis: Based on the Russell indices, value investing has outperformed growth investing for seven straight years (2000 through 2006), which has never happened before. Financial stocks, such as banks, led the value indices (e.g., Russell 1000 Value) higher in the past several years. However, in my opinion, value stocks, such as GM, peaked last year when many low-quality value stocks led the overall stock market higher in 2006.

So far in 2007, growth stocks have outperformed value stocks every month, and the financial stocks that dominate the value indices, such as banks, have "flamed out" due to the ongoing credit crisis in CMOs and CDOs. Some big banks, like Bank of America (BAC) now have dividend yields in excess of 5%, so the selling in financial stocks is getting overdone, but due to the overhanging crisis in subprime mortgages, mortgage companies and other financial stocks have been hit very hard and may continue to be hit with relentless selling pressure as Wall Street shifts its focus away from value investing to growth investing. I suspect that growth investing will outperform value investing for possibly two years or more.

Q. Why wouldn't the Fed want to cut rates again? Are there any sectors that could be hurt by a rate cut instead of helped?

Louis: The Fed cannot not fight market rates, so they will keep cutting as long as the Federal Funds rate remains substantially above market rates, based on short-term Treasury bills. The Fed's favorite inflation indicator is the Personal Consumption Expenditure (PCE) index, and it's currently within the Fed's official comfort zone of 1% to 2%. As inflation remains within the Fed's target range, the Fed will likely keep cutting interest rates. There really are no industries that are hurt by a Fed cut, since it helps bolster economic activity, which is good for all sectors.

Q. The technology and telecommunication sectors seem to be thriving; could this be more than just a trend? I'm new to your system. Do you have any particular tech recommendations for new investors?

Louis: You're right. We are in the midst of a new technology boom, but it's not centered around the personal computer. Instead, it's focused on your cell phone (e.g., touchscreen on iPhone), vehicle, home appliances and other gadgets that compose the "next generation" of technology. The booming aviation and defense industries are also driving the technology boom. Some of the most exciting stocks caught up in this boom are America Movil (AMX), Flir Systems (FLIR), FARO Technologies (FARO) and Synaptics (SYNA), all of which are recommended in my Emerging Growth newsletter.

Q. Louis, what are your current thoughts on the stocks related to the housing bubble? Are stocks like LEN and CFC on your radar at this time?

Louis: Both Lennar (LEN) and Countrywide Financial (CFC) receive a total grade of "F" on PortfolioGrader Pro. Every stock that trades 5,000 shares a day in the past 52 weeks is located in my database and is therefore on my radar. Rest assured, I have no intention of buying either Lennar or Countrywide Financial until their ratings improve to at least an "A" or "B" grade in PortfolioGrader Pro.

That's all for this week. I'm spending Thanksgiving with my family here in Reno. We like to order our turkey and heat it up. My son loves watching the Food Network, but I don't think he's quite old enough to do Thanksgiving dinner. Tomorrow is also my 50th birthday.

I hope everyone has a safe and wonderful Thanksgiving!

Sincerely,

Louis Navellier