It has been a tough year for most growth-stock pickers. How have a few posted strong returns in a weak market?
By Jinny St. Goar
November 2000
Institutional Investor Magazine
For four years running, from 1995 to 1999, even the dullest growth-stock manager looked like a sage. Losing money in the hottest portion of the biggest bull market in history was hard work. But with the Standard & Poor’s 500 index and the Nasdaq down 7 percent and 20 percent for the year, respectively -- and the Nasdaq about 35 percent off its March high -- the rules have changed. Most growth-stock pickers are having a tough time adjusting: According to Morningstar, the average growth fund reported a 7.7 percent return through October.
Some growth money managers have beaten the odds, finding the exceptional technology and health care stocks that are prospering in a weaker marketplace. Aside from their focus on these two sectors, these investors also share an aversion to pure dot-com plays. Says Thomas Trantum, manager of Nashville, Tennesseebased Mastrapasqua Associates’ five-year-old Touchstone Aggressive Growth Fund, “We stay away from companies that are not profitable, and that means we’ve stayed away from the dot-coms and IPOs.” The group subscribes to a longer-term, buy-and-hold philosophy. While the average growth-stock portfolio turns over about 50 percent a year, the successful managers featured in this story have no more than 20 percent turnover -- and in one case, just 1 percent.
James Oelschlager’s $6 billion White Oak Growth Stock Fund, with turnover of less than 10 percent, returned an impressive 20.3 percent through late October; its five-year annual average is 36.3 percent, versus 19.4 percent for the S&P 500. Oelschlager, 57, generated those gains by restricting his portfolio to 25 carefully selected names. Net new cash flow into the fund through September 30 was $2.4 billion. “We think we’ve got a handle on the big picture,” he says, noting that a well-defined economic outlook makes constant, short-term portfolio shifts unnecessary.
The White Oak stock picker, whose firm is headquartered in Akron, Ohio, delivers his returns even though he keeps 54 percent of his portfolio in tech stocks. “This is a uniquely attractive sector, with good pricing and good potential for unit sales growth,” he says. “But we focus on subsectors.”
Oelschlager, who began his career in 1969 working as manager of Firestone’s defined benefit plan, has caught the fever for data storage. The management of business and household information has grown exponentially over the past few years. Oelschlager bought EMC Corp., whose software is helping to create central repositories for data and access to them, in February 1999 at an average price of $25 a share; it recently traded at $84. He picked up Brocade Communications Systems, the switchmaker for storage area networks, in May for $109; the stock has more than doubled to $225.
Oelschlager also likes to buy blue-chip tech stocks when they have temporarily fallen out of favor. When Intel Corp. preannounced disappointing quarterly results during the last week of
September, Oelschlager picked up an additional 700,000 shares of the chip maker at an average price of $46. He then added 300,000 more shares when the stock dropped to $42 on the actual earnings announcement. In early October his stake in Intel -- which he began accumulating back in 1993 at a split-adjusted price of $15 -- represented 3.3 percent of White Oak’s holdings. He’s convinced that the stock, at a recent $45, will take off again. “Look at the accelerated number of patents being granted now, and productivity increases [at the company]. We are just beginning. My peers are far too short-term-oriented,” he says. “In three years [Intel’s] buyers will look smarter than the sellers.”
Mastrapasqua Associates’ Trantum has also been able to discern the tech winners from the growing list of losers: His $100 million-in-assets Touchstone fund was up 4.2 percent through mid-October, with about half of the portfolio’s holdings devoted to tech companies. Like Oelschlager, Trantum keeps turnover low; in his case, it’s just 17 percent a year.
Trantum focuses on pharmaceuticals, Internet infrastructure and telecommunications. “We look at projected earnings over a three-to-five-year horizon and compare them to the risk-
adjusted price-earnings ratios,” he says. A large differential suggests that the stock is attractively valued. “This model lets us rank companies across industries according to the growth that is being purchased relative to the risk,” Trantum explains.
These days health care represents 29 percent of the portfolio, with most of the holdings concentrated in companies working on genomes, like MedImmune and Genentech.
Unlike many of his peers who jumped on Internet infrastructure stocks in 1998 and 1999, Trantum bought some of the most familiar names when they were still relatively small and cheap. “That’s one of the keys to our low turnover,” he says.
He first bought computer software leader Oracle Corp. back in 1996 at a split-adjusted price of $3.80 a share; the stock traded recently at $31. Today his stake represents more than 9 percent of his fund’s total assets.
Back in 1995, when just 4.5 million U.S. households had Internet connections (versus 93 million today), Trantum’s fund started buying Sun Microsystems at $2 a share. The stock, which traded recently at $125, now comprises more than 7 percent of the portfolio. Trantum projects annual earnings growth of 30 to 35 percent for the next several years and calculates the stock’s risk-adjusted P/E at about 25 percent. That 10-percentage-point differential gives Trantum comfort in hanging on for the long haul. “Sun’s fundamentals have only improved,” he says.
In the telecom sector, Trantum is betting on companies that will benefit from lower-cost access to the market and those firms that are providing the access, such as JDS Uniphase Corp., despite its recent hammering. He first bought JDS in July 1999 at about $21 a share, and today, trading at about $70, the stock represents more than 9 percent of his portfolio.
Portfolio manager Richard Freeman, with $4.5 billion in his large-cap Smith Barney Aggressive Growth Fund, pulled out a 23.2 percent return through late October.
Since taking the reins of the fund back in 1983, he has kept turnover at less than 10 percent a year. He concentrates on about 40 stocks out of a small roster of just 70 names. “Low turnover obviously benefits your shareholders if you are sticking with a company that does well. The best way to make money in the long term is to find companies with strong and growing cash flow.”
Freeman credits much of his robust return in 2000 to health care. He first bought Forest Laboratories, a pharmaceuticals company best known for its antidepressant, Celexa, in 1983 at an average price of $21 a share. It is up 120 percent for the year, to a recent $131. He also did well with a handful of financial services names. He bought Neuberger Berman when it went public in October 1999, making a bet on the firm’s management (Freeman worked with Neuberger CEO Jeffrey Lane when Lane was president of Lehman Brothers.) Freeman has an average cost of $34 on the stock, which traded recently at $60, mostly on takeover speculation.
C-Cor.net Corp., a telecommunications equipment supplier to the cable TV industry, illustrates Freeman’s efforts to find a diamond in the rough. The stock now trades at a P/E of 21, versus 140 for the sector, because it doesn’t have a big institutional following, Freeman says. “I think it’s a chance to buy a growth company at a value price.” He paid an average of $11.67 for his 2 million share position, as compared with the recent price of $15.54.
When you pick the right names at the outset, low turnover can be a wonderful thing. Back in April 1990 Freeman bought Genzyme Corp., a biotech and health care company that develops cancer therapies, for a split-adjusted price of $7.57. After adding to his position over the years, Freeman has an average cost basis of $31.70 in the stock, which now comprises 3.4 percent of his holdings. The stock recently traded at $71.88.
Freeman says he feels no temptation to pare back his position at this juncture. He’s not looking to cash out, only to buy back the stock in a few months. High-turnover traders naturally take a different tack, but few of them can also boast of being up more than 23 percent for the year.
