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NEW YORK (CNN/Money) -
The late 1990s boom seems to have convinced many investors that growth is synonymous with small high flyers. But in the past few months, classic growth stocks GE and IBM have recovered some their former luster.
The two companies still don't get the respect they deserve. But today's uncertain economy, classic giant growth companies are likely to attract more investors because of their predictable, above-average results.
The most aggressive growth stocks are typically focused on an overly narrow line of products or services. By contrast, IBM offers a broad range of computer hardware and IT services. And GE is even more diverse, with operations in 11 different industries.
Academic research shows that companies with diverse businesses and moderately above-average core earnings growth typically outperform more rapidly growing companies with price/earnings ratios above 25. The reason: moderate growth is easier to sustain, while high-flyers often soar too high and then crash.
GE and IBM are worth a closer look for another reason. Traditionally, they have been bellwethers for the U.S. economy. In October, I wrote that GE's earnings were more impressive than they first appeared because they signaled a new upswing for GE and a continuation of the economic recovery.
That proved true and was confirmed in GE's fourth-quarter earnings report released last week. Total net profit climbed 18 percent on an 18 percent gain in sales. That beat analysts' consensus estimates for the quarter by a penny a share. After taking changes in tax rates and dilution into account, the adjusted increase in earnings per share was slightly lower.
Nine of GE's 11 divisions showed double-digit profit gains. NBC Universal -- which includesUniversal Pictures, acquired last year -- posted a stunning 60 percent increase in profits. Results were buoyed by the success of "Meet the Fockers" and "Ray."
Among the other divisions, health care was up an impressive 50 percent. The only divisions that suffered a drop in sales were energy, hurt by a decline in the demand for turbines, and insurance, which was undergoing restructuring.
Analysts overall are mildly positive on the stock, but tend to underestimate the company's prospects. GE itself has projected earnings gains of more than 10 percent not only for 2005 but also for 2006. And analysts expect earnings growth to average a double-digit rate over the next five years.
Circumstances can always change without warning, of course, but current trends for GE (Research) are certainly positive. At $35.26, the stock trades at less than 20 times this year's estimated earnings and yields 2.5 percent, a surprisingly fat dividend for this sort of stock.
Analysts complain about IBM's predictable quarterly earnings reports the way New Yorkers complain about too much good weather in California. Last week, IBM reported a 16 percent rise in earnings on a 7 percent gain in revenue.
IBM's greatest strength continued to be double-digit growth in services and consulting revenues, principally for corporate customers. And analysts expect large companies to boost their IT spending if the economic recovery picks up in 2005.
Sales of computers used as servers were also solid.
IBM recently agreed to sell its PC business, a deal expected to close within the next six months. Shedding that division should raise IBM's average revenue growth rate and boost profit margins a bit.
As a result, some analysts expect the company to perform better over the next five years than the consensus forecasts suggest, with earnings rising at a double-digit rate.
At $91.79 a share, IBM (Research) is trading at less than 17 times earnings. But the stock would certainly merit a higher P/E if growth does accelerate a bit over the next five years. In any event, IBM is a natural choice for conservative investors who want to include some technology shares in their portfolio mix.
Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday.
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