Investing: Time to go back to basics By Conrad de Aenlle Published: August 3, 2007
The stock market's abrupt about-face is making portfolio managers nervous, but it is not making them sell, many say. Instead, their response to the cascade from record highs has been to ensure that they own shares of businesses less sensitive than most to changes in economic conditions or to the whims of investment fashion.
These are stable-growth companies that sell necessities or cheap, desirable basics, like food and drink, health care, clothing, leisure and entertainment, and they have been almost ignored by private equity and hedge fund managers.
These industries dominate the selections of mutual fund managers asked to name stocks that they are most comfortable clinging to in turbulent market conditions.
Randy Haase, manager of the Baron Fifth Avenue Growth fund, said he had an "ultra-high focus on quality" that steers him toward stable growth companies. He especially likes businesses that are taking market share from their peers and that are involved in industries that are growing faster than others. "If I'm in a canoe, I want to have the current with me, not against me," he said.
His first choice is the British company Diageo, the world's largest seller of spirits through such brands as Smirnoff, José Cuervo and J&B. That business is booming as younger drinkers graduate from beer to mixed drinks, Haase said. Another selection is Procter & Gamble, which has no shortage of top brands, including Crest toothpaste and Gillette razor blades. Multimedia Graphic
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"Beauty, health care and home care are growing more rapidly than other segments of the consumer industry," he said, yet P&G stock is all but ignored by other investors. The same goes for Diageo, and he finds the lack of interest in these and other "extremely predictable and reliable" companies baffling.
"Some of them trade at the same or lower valuations than the market, but they have that 20-year track record of consistent, strong earnings growth," Haase said. "It doesn't make sense. Usually they get a premium for that consistency."
Barbara Walchli, manager of the Aquila Rocky Mountain fund, has been increasing her exposure to growth stocks for the past year. She, too, is looking for consistency with something extra, and that has lured her particularly into health care.
Three of her choices exhibit "strong new-product momentum": Merit Medical Systems, a maker of cardiac and other surgical devices; Myriad Genetics, which has a drug for Alzheimer's disease in clinical trials, and Spectranetics, a maker of items like catheters used in cardiovascular procedures.
"These companies are producing products which improve patient outcomes and can potentially reduce health care costs," Walchli said. "With the aging of the baby boomers, these products and cost savings will be important."
Rick Drake, manager of the Aston/ABN AMRO Growth fund, also likes health care companies with "value-added products that are good for patients and cost effective," like ResMed, which makes medical appliances, and Express Scripts, a consulting firm that manages pharmacy benefit programs for corporations.
Drake's list of comfort stocks strayed from the staples theme favored by his peers. His favorites include General Electric; Boeing; Illinois Tool Works, which supplies a range of products from adhesives to packaging materials, and Johnson Controls, a maker of environmental systems for buildings. Strong order backlogs, leadership positions in their markets and international growth should keep them well insulated in a market decline, he said.
Robert Barringer, manager of the F.B.R. Pegasus fund, said he was avoiding economically sensitive sectors that have performed well this year, including energy and auto manufacturing, and concentrating on consumer staples and health care. Examples include the chewing gum purveyor Wrigley; 3M, which makes Scotch tape and other inedible consumer staples; Novo Nordisk, a Danish company that is a world leader in diabetes treatment, and the drugstore chain Walgreen.
He marveled, as Haase did, at the disdain that Wall Street has shown for businesses with highly reliable earnings. "You can get into these areas without being worried about valuations," Barringer said. "The sectors with less risk are cheaper. You don't have to pay as much for your safety."
RMD Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
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