Look to Large-Cap Growth Stocks

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Feeling a little battered by the markets? For reasons of health and sanity, this might be a good time to revisit large-cap growth stocks. That’s the view of the head of Minneapolis-based Winslow Capital Management, Clark Winslow, who has been following the sector pretty much his entire career.

According to Mr. Winslow, growth has never been cheaper. A chart plotting the Russell 1000 Growth Index divided by the Russell 1000 Value Index shows this to be true, at least relative to value stocks. Whereas in 1999 the super-hyped tech sector sent the comparison to new heights, it is currently at the lowest level of the past 25 years.

Indeed, since 1999 growth has substantially underperformed value, a grouping that includes many companies that have benefited from the love affair with energy and other commodities. This departure has been sizeable, and is noteworthy in that for the 20 years leading up to 1998, for example, the two sectors performed pretty much in concert.

So, either it’s a brave new world or sensible investors should be taking a new look at growth stocks. Mr.Winslow manages institutional money and is a sub-adviser on New York Life’s Mainstay Large Cap Growth Fund. He clearly advocates taking advantage of the slump in growth shares, as does the president of investment management for New York Life, Brian Murdock.”For some time now we have felt that clients should be rotating into that sector,” Mr. Murdock says. “Shouldn’t companies with above-average growth characteristics command a premium?”

Mr. Winslow grew up following tech stocks for Baker, Weeks back in the day when 50-page reports were the norm and analysts were paid to actually pry information out of managements. (It was considered competitive advantage, not cause for incarceration.) Mr. Winslow scored a coup early on: He discovered that semiconductors were not in short supply, as the Street thought, but rather that plants were sitting idle. He issued his first big-time sell recommendation, causing a delayed opening in the stocks. Five months later, when he recommended the fallen but recovering industry, he couldn’t get anyone’s attention.

Such an experience teaches valuable lessons about the value of research, which Mr. Winslow prizes to this day. It has served him well. The team running Winslow Capital has been in place since 1999. Since then, his group has outperformed the Russell 1000 Growth Index by a sizeable margin each year, and in the first quarter of this year.

For the past seven years,the index has been down by a cumulative 2.6%, while Winslow Capital has reported a gain of 3.3% – a difference of 5.8% annually.In the past year, WCM was up 22.6%, compared to the benchmark 13.1%. Though results were negative in 2000-02, WCM was still ahead of the growth universe.

It should be noted that Mr.Winslow’s group did not fare so well prior to 1999. Because of poor performance, he made some changes in the team,emphasizing the need for top-notch research. He also imposed on the group a harsher sell discipline, which, in his view, has made a significant difference.

The team builds the portfolio by looking for companies that will promise overall annual weighted earnings growth of 15%-20%. A stock must offer either longterm classic growth with a valuation below its peers,be a quality cyclical such as Intel, or be a participant in a newer startup industry. These latter prospects usually have market capitalizations between $4 billion and $20 billion, and more accessible managements.

Positions typically comprise 1%-3% of the portfolio. Further,each addition to the portfolio must comply with the group’s desired sector diversification. Sector weightings can vary up to 10 percentage points either way. That is, if health care is 20% of the benchmark, the weighting in the portfolio can range between 10% and 30%. Also, growth rates of companies should vary, as should P/E multiples. Overall, though, the growth premium must be above the valuation premium for a company to be selected.

A good example of the firm’s approach was the decision to buy Corning (GLW, $24) in 2004, at $11.50. Improving market share and margins, a leading market position, and a P/E ratio significantly lower than comparable tech and large-cap growth companies attracted Winslow Capital.

The team’s sell discipline is crucial to its success, Mr.Winslow says. If the valuation on a stock becomes excessive, if the position exceeds 5% of the portfolio, or if the story begins to depart from the original purchase rationale, the firm may trim or eliminate the holding. An intensive review may also be sparked by a sharp sell-off in the shares.

The strategy worked well in the decision to dump shares of Apollo Group (APOL, $52), which the firm had bought at about $40 in 2002. Some deterioration in fundamentals, combined with a rise in the stock’s price to more than $90, caused WCM to trim holdings as the stock sold lower.

Of late, Mr. Winslow has been buying Cisco, Microsoft, and Proctor & Gamble. P &G was bought after the Gillette deal, despite some expected dilution. Winslow’s research showed that benefits from cost savings and combined marketing would ultimately work in favor of the combination. Expected growth of 13% compared favorably with the stock’s valuation.

Mr. Winslow expects that as the economy slows, growth stocks will begin to outperform. He remains optimistic about inflation, citing several bullish factors.”Worldwide competition is so intense. Productivity gains are still excellent, which should offset labor cost increases.” Mr. Murdock concurs. “That’s where the puck is going; investors should be skating in that direction.”

Peek10021@aol.com


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