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The Skinny on Growth Investing
M*_Karin
06-27-2008, 12:11 PM | Post #2533195 |
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Robert Hagstrom of Legg Mason Capital Management, Dennis Lynch of Morgan Stanley Investment Management, and Alex Motola of Thornburg Investment Management look at growth investing through different lenses. Here are some of the of insights they shared today:
On Style
Lynch looks for undiscovered value in high P/E stocks through things like cash flows, high return on invested capital, quality of earnings, low market penetration, and competitive advantage. He thinks that people equate growth to price momentum and that unfortunately “momentum” has a dirty ring to it. He explained that unlike traditional value investors who buy unloved stocks and sell them when they are hot, he aims to hold them while they’re still hot.
Motola acknowledged that there is certainly a marriage between value and growth, adding that he also looks for businesses that are turning around faster than what is perceived by the market in general. And Hagstrom, taking some cues from Warren Buffett, describes his investment process as trying to find the best tech franchises of the 20th century.
Financials
Hagstrom has ventured into the space, primarily because he sees the most mispricings occurring here. He picked up Freddie Mac FRE based on his belief that we are getting through the worst of the credit crisis and because it’s a dominant player in its business. While he believes that we aren’t out of the woods in terms of write-downs, he and his team have focused on building normalized earnings models to sniff out the best prospects. Additionally, Hagstrom still favors AIG AIG and Citigroup C for their dominant positions in their respective industries in addition to their strong brands.
Motola and Lynch told a different story. Motola indicated that the lack of transparency surrounding financials firms has kept him away. From time to time, he has scooped up banks and exchange stocks, but he indicated that he will keep poking around in other industries in the meantime. Lynch has stayed away from the space for similar reasons and acknowledged that he’s not sure he and his team would be able to pick out the right situations under current market conditions.
Energy
Lynch, also a Buffett fan, has a hefty stake in oil & gas firm Ultra Petroleum UPL, which he likes for its status as a lowest-cost provider of natural gas and years of drilling experience. Given what he sees in the firm’s competitive advantage, he views it as an acquisition target by one of its larger peers.
Hagstrom acknowledged that he missed the boat on energy. In 2003-2004, his team felt like there were more attractive alternatives to the energy space, such as Amazon AMZN. As far as his views on energy today, he believes that this is either a super cycle ready to pop or it’s morphing into a secular cycle. Noting that Wall Street is still treating earnings as if these are cyclical firms, we will be able to see the secular story unfold if multiples start to expand, and in that case, energy holdings are undervalued today.
Tech
Hagstrom has made a lot of money for shareholders on long-termers like Amazon and Google GOOG. He looks at these holdings in terms of economic return, as he doesn’t see that any competitor could get enough capital to unseat these industry incumbents.
All three of these managers own Google. Like Hagstrom, Motola bought Google went the company went public, which he considered to be a great opportunity as a smaller money management firm. Even though the company is spending a lot of cash on its workforce, he still finds the stock’s multiple very attractive because its competitors are still in disarray, and its dominant position in global market share (primarily in the U.S. and Europe) gives them pricing power. Lynch finds the valuation reasonable based on what they already do in addition to their scale and optionality.
Health Care
All three managers pointed to regulation as being one of the major challenges in this sector. For Motola, the recurring revenue aspect of many of these firms remains one of the selling points. He’s been moving more toward biotech, and he likes Gilead Sciences GILD, Alexion Pharmaceuticals ALXN, Genentech DNA, and Celgene CELG because these firms have proven drugs with a clear path to profitability.
Hagstrom also sees biotech replacing big pharma as the best opportunity for growth. And generally, he has stayed away from names with binary risk (where one failed drug could torpedo a company’s stock price) and thinks HMOs are going to be a tricky space because of the new administration.
Lynch finds the sector attractive because of inflation and demographics, but the trick lies in finding a way to play this big theme.
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