Amgen among favourite holdings
B U Y & S E L L R O U N D TA B L E
The strong
loonie has
made U.S.
investments
much cheaper for
Canadian
investors. Those interested in dipping a toe into U.S. waters will find no better team of advisors than this group. In the third instalment of a four-part roundtable on U.S. investing, our panelists explain their investment styles. With outlooks ranging from being an “equity holder” to large-cap growth, to using quantitative and fundamental analysis, they outline favourite sectors and individual equities for Buy & Sell columnist Sonita Horvitch. Q: It is time to talk investment styles. O’Reilly: I manage the Investors Global Fund out of Dublin and in selecting stocks I look at return on equity of companies and the price you pay for it. My view is that I am an equity holder, when I buy that equity I want to see it growing and I want to know what kind of a premium I am paying for that growth. Looking at technology, including the Internet sector, you are very much buying perceived growth, rather than growth delivered. The problem with the large-cap U.S. tech stocks is where is the next level of growth coming from? I have been underweight technology for as long as I can remember. It does not stand up to my discipline. On other sectors, we have had a substantial overweight in energy and materials over the past five years and we have been reducing that weighting. Our portfolio has been cyclical and we have been reducing that in favour of more defensive areas such as telecom services and health care. Myszkowski: We manage the ABN AMRO U.S. Large Cap Growth Fund. ABN AMRO is a worldwide banking institution. I am based in Chicago and we manage approximately US$ 3- billion in assets using a large-cap growth style. With US$ 3- billion in assets, we have the ability to put onethird of our portfolio in more mid-cap stocks. We screen about 6,000 companies on five points — past five- year sales growth versus the S&P 500 index, past five-year operating earnings-per-share growth, earnings stability, return on equity and the current balance sheet, looking at long- term debt to total capital. This screening leaves us with 250 companies and then our analysts look at the fundamentals more closely. Some 75% to 80% of our ideas are internally generated. We do have a concentrated portfolio of 39 stocks. The stocks are there for a two- to three-year period as we have turnover of about 25% to 30% per annum. Some of the ideas in the portfolio have been there for five or six years or longer. Blackstein: I used to have 39 stocks in the Dynamic Power American Growth Fund and other U.S. growth portfolios run on similar lines. As I have gotten older, I have found that it is difficult to herd cats. Myszkowski: We are overweight health care, which represents 16.4% versus 13.2% for the S&P 500 index, consumer discretionary stocks, which are 19% of our portfolio versus 13% for the S&P, we are overweight in technology, which represents about 24% of the portfolio versus 15.5% for the S&P 500 index. We are slightly underweight financial services stocks with 16% versus 19% for the S&P. What has dragged our earnings down over the past 18 months is the absence of energy stocks, because they do not pass our screening criteria. In health care, we have a 2.5%-3% weighting in the biotech company, Amgen. Blackstein: I have about 8% of the portfolio in Amgen. Hensen: I have 1% of my U.S. large-cap core fund in Amgen. Myszkowski: We also have health-care service provider Cardinal Health Inc. ( CAH/NYSE) in our portfolio. It is about 1.5% of the portfolio, it was 3.5%. The industry model has changed. We cut the holding over the past several months. Another holding is Express Scripts ( ESRX/ NASDAQ), which is in pharmaceutical benefit management. It is 1.6% of the portfolio. Chang: It is 1% of our U.S. midcap portfolio. Myszkowski: In health care, we also own Gilead Sciences Inc. ( GILD/ NASDAQ), which is in infectious diseases, including HIV. We are looking for growth of 17% to 20% in earnings per share per annum. We also own Medtronic Inc. ( MDT/ NYSE), which is 3.5% of the portfolio, it has been a longterm holding. In this business, we have also been buying St. Jude Medical ( STJ/NYSE) in the past several months. It is 1.5% of the total portfolio. Zimmer Holdings Inc. ( ZMH/ NYSE), which is in the artificial knees and hips, is about 1.5%. Hensen: We own Stryker Corp. ( SYK/ NYSE), which is a competitor. Chang: We just sold Zimmer because its market capitalization became too big for our mandate. Myzkowski: The only pharma company which we have is a small position in Pfizer Inc. ( PFE/ NYSE), currently at about 1.5%. Our biggest holding in the technology sector is Dell Computer Corp. ( DELL/NASDAQ) at 3% of the portfolio. We own Cisco Systems Inc. ( CSCO/NASDAQ), but we have been cutting back on that. We have put some money into Electronic Arts Inc. ( ERTS/ NASDAQ), which is in the computer-game industry. Our biggest financial services sector holdings are State Street Corp. ( STT/NYSE)
at 2.5% of the portfolio and college loan provider SLM Corp. ( SLM/ NYSE), or Sallie Mae, at 3.5% of the portfolio. We also own MBNA Corp. ( KRB/ NYSE), which is going to acquired by Bank of America ( BAC/ NYSE). B of A is a cheap stock and we will make the decision whether to maintain a position in this stock, when we get this stock. Q: Chris, let us discuss MFC’s discipline. Hensen: We are a blend of quantitative and fundamental analysis. Quantitative is about threequarters of our work. On the quant side, we focus on five key factors — earnings predictability, analysts’ earnings revisions, valuation, the timeliness factor to add to positions if we do own them or initiate new positions, and earnings surprises. We typically do not take sector bets. We manage our portfolio relative to the benchmark index. Our pension fund clients look to us for that approach. We own far less concentrated portfolios than what was discussed here. We are overweight U.S. financial services stocks. It has not really helped us over the last year. We are finding some great upward earnings revisions and good valuation profiles amongst the brokers. Names include Merrill Lynch & Co. ( MER/NYSE) and
Goldman Sachs Group Inc. ( GS/ NYSE). The brokers are trading at less than two times book value with very high returns on equity. Investors may enhance the valuation on these stocks. We own the laggard bigcap stocks such as Citigroup Inc. ( C/NYSE)
and Bank of America Corp. ( BAC/ NYSE). These do screen well on valuation. This sector can do better, especially if the U.S. Federal Reserve Board stops raising short- term interest rates.
We have a modest overweight in health care. We have also been overweight technology, which ranks as the third-highest when it comes to positive earnings revisions. We are seeing positive revisions for this year and next. P/E multiples have come down dramatically since the tech bubble. I am looking for companies that are in a good product cycle and producing strong revenue growth. We are not looking for turnaround stories in technology. They do not seem to work. Look at Lucent and Nortel. We do like Marvell Technology Group Ltd. ( MRVL/ NASDAQ). Blackstein: I own Marvell too. I have just taken it from 6% to 5%. If a stock doubles, having a 1% position in the portfolio does not do much for performance. I understand that it can work in the opposite direction too.