By: Larry MacDonald

One of the inefficiencies in the stock market may be a tendency for investors to give growth companies too much credit during economic upturns and not enough during economic downturns. That is, they fail to differentiate between growth tied to the company’s business model and growth tied to the economic cycle.

During business upswings, when cyclically enhanced earnings are more likely to beat financial expectations, investors develop an inflated view of the growth company’s long-term growth prospects and bid the stock up to high levels. But when the economy turns down, the cyclical component of earnings fades and precipitates negative earnings surprises, doubts about the company’s model, and dramatic sell-offs in shares.

The best time, then, to build positions in solid growth companies like Google (GOOG-NASDAQ) and Apple Inc. (AAPL-NASDAQ) may be during slowdowns in the economy like now. Their stocks are selling off thanks in large part to earnings disappointments related to cyclical factors. But their underlying business models are still in tact and ready to emerge stronger than ever when the economy recovers.

The latest quarterly results for both Google and Apple came in under expectations, and so their stocks were dragged down. The next few quarters may see more disappointments in financial results as the economy continues to wilt, presenting accumulation opportunities for investors with long-term views.

An Investing Ideas post on March 20 discussed buying Google when the stock was trading at $433. The shares subsequently climbed to $600 but then fell back, and today touched $433 in intraday trading.