T. Rowe Price Jr. was a legendary investor and founder of T. Rowe Price Associates, a global investment management firm. He is widely regarded as the father of growth stock investing, a style that focuses on companies that have the potential to grow faster than the market or the industry average¹.
According to Price, his stock selection process was based on four main principles¹:
– He looked for companies that had a strong competitive advantage, a clear growth strategy, and a capable management team.
– He sought companies that operated in industries that had favorable long-term trends, such as rising demand, technological innovation, or regulatory changes.
– He preferred companies that reinvested their earnings into expanding their business, rather than paying high dividends or buying back shares.
– He held his stocks for the long term, unless there was a significant change in the company’s fundamentals or prospects.
Price also developed a life cycle theory of investing, which divided companies into four stages based on their growth rate and valuation¹:
– Pioneer: These are young companies that are developing new products or services, but have not yet proven their profitability or market acceptance. They are very risky and speculative investments.
– Growth: These are companies that have established a strong market position and are growing rapidly, both in terms of sales and earnings. They are attractive investments, but often trade at high multiples of earnings or book value.
– Stabilization: These are companies that have reached maturity and are facing increased competition or market saturation. They are still growing, but at a slower pace than before. They may pay dividends or buy back shares to return capital to shareholders. They are moderately priced investments, but offer limited upside potential.
– Decay: These are companies that are losing market share, profitability, or relevance due to technological obsolescence, regulatory changes, or other factors. They are declining investments, and should be avoided or sold.
Price used this framework to identify companies that were in the growth stage or transitioning from the pioneer stage to the growth stage. He also avoided companies that were in the decay stage or transitioning from the stabilization stage to the decay stage¹.
Some examples of companies that Price invested in using his stock selection process include DuPont, IBM, Xerox, Polaroid, and Texas Instruments¹. He achieved remarkable returns over his career, outperforming the S&P 500 index by an average of 4% per year from 1937 to 1968¹.
I hope this helps you understand T. Rowe Price Jr.’s stock selection process. If you want to learn more about his approach and philosophy, I recommend reading his book Picking Growth Stocks.