Amid the sturm und drang of the economic crisis, many investors have naturally been too skittish to invest in stocks-even as stock prices have boomed. As Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., said at a February 10 conference in New York, the stock market has almost doubled since the market crash and yet there was still an ebb tide in U.S. equity fund flows continuing into 2010.

As investors inevitably get over their fear and wade back into the market (they already seem to like emerging markets), it is likely to reignite the growth-versus-value debate, as investors ask which sector deserves a bit more weight and attention if the market is poised for momentum. The extra liquidity in the market and the burgeoning demand from emerging markets seem to reinforce this feeling that there will be a growth spurt in U.S. large-cap growth equities.

But that also depends on how you gauge the health of the economy. Despite the stock market rebound, Americans still writhe in the teeth of stagnant economic recovery, hovering somewhere between wariness and hope. GDP is expected to grow moderately at under 4% this year. Americans still regard with walleyed frustration the mixed unemployment signals. They still smart from slumping home prices and generally worry about their wealth as they try to deleverage their own households. In such an environment of muted growth, it might seem a bad time for growth stocks. Or does it?

Robert Turner, manager of the Turner Large Cap Growth Fund (TSGEX), says growth stocks are actually bound to outperform in a sluggish market because their very nature is to outpace everything else when the broad economy is limping along. Such companies anticipate earnings per share growth over three-to-five years, he says, which means they often sport some major advantage regardless of what the market is doing. They boast new technologies, or have some lock on developing overseas markets. They might be champions in their markets, like Teva Pharmaceuticals, a generic drug company set to explode as people age and governments turn to cheaper health care alternatives. They might be giants like Apple, which is still selling iPhones and iPads like cups of roadside lemonade on a hot summer day. Or it might be a company like FedEx that's growing abroad, its cheerleaders say, and ably pushing costs through to its customers, even though the threat of higher oil prices looms large.

It sounds counterintuitive, admits Turner. But he says it's value stocks that actually benefit more from the economic salad days-especially those companies in the materials, energy and financial areas that need the big tailwind at their back. Meanwhile, "when you've got only modest economic growth, which we have now, you have a situation where investors [prefer] those companies that are able to grow their earnings even without economic assistance."

He name checks Apple, a staple of several growth funds: "We've been saying for a while that Apple is going to earn $25 per share this year, regardless of the U.S. growth."

But there are different ways to read the tea leaves: Do you think the market is picking up or not, and if it is, do you really think growth would benefit more than value?

Some note that growth might have already had its run, oddly enough. In the Morningstar fund universe, large-cap growth funds returned 15.53% in 2010, outstripping both large-cap value funds, which returned 13.66%, and the blended categories, which returned 14.01%, according to David Kathman, a Morningstar fund analyst. (Growth also persevered in the smaller categories.) Turner agrees that the growth stock run goes back to 2007. Three-year returns for the S&P 500 growth index were almost 3%, and almost negative by the same amount for the S&P 500 value index. You might not have noticed the line charts, of course, since they were scumbled by volatility and the 2008 maelstrom.

If you're a growth cheerleader, however, it certainly looks like Candyland out there for cheap stocks on a forward earnings basis-no matter what your stripes, many large-cap stocks are looking cheap. There's a lot of growth to buy, some of it offering dividends. So maybe you can have your growth and eat it, too.

Michael Cuggino, who helms the Permanent Portfolio (PRPFX) a five-star Morningstar portfolio, invests in a variety of assets, including bonds, gold, silver, REITs, etc. But he's also got a pure stock fund. And for his equity drafts, he's seeking growth at a good price.
"Our view is that there are opportunities all over the place in the U.S. market," he says. "It is in fact being aided by liquidity-the monetary policy in the U.S. right now-as well as to a lesser degree abroad. But having said that, stock prices are reasonable right now in the U.S. They've been supported by corporate earnings; there is tremendous liquidity that still could come into the market and expand multiples. And the risk/reward for owning stocks right now versus other asset classes, like say bonds, is greater."

Among Cuggino's holdings are FedEx, Disney and Freeport McMoRan. FedEx, he says, is aggressively growing both in the U.S. and abroad but at the same time has been pushing through price increases and maintaining its cost structure. Disney, which he says is something he might normally call a value stock for its participation in the fickle entertainment field, has been growing at a fast clip in the past year, rising from around $29 a share in the beginning of 2010 to $43 or so in February 2011. Cuggino says that despite cyclical businesses like movies and theme parks, the company seems to be hitting on all cylinders and not missing any opportunities with its Hannah Montana and High School Musical franchises.

Freeport, meanwhile, is perhaps another contrary move, he says. While most people might not see commodity stocks as growth, the amount of copper being yanked out of the ground hand over fist for auto production and infrastructure-along with the highly liquid monetary environment-means amped up returns. "Supply-demand plus devaluation of the currencies-to me that's a growth story," he says.

Yet Cuggino notably does not own Google or Apple-two companies so ubiquitous in growth portfolios that they often seem like silent partners. He concedes that he missed an opportunity by not buying Apple earlier in the decade when the consumer product potential of the company wasn't as apparent to him. But he eschews it now for another reason: It's just not cheap enough.

"One of the reasons we've not invested in [Apple or Google] is because they just weren't good values, although we recognize they're great companies. They're growing because everybody wants to own them, and so that drives up the price and we tend to consider the price that we're paying for the stocks we own."

Albert J. Meyer, the portfolio manager of the Mirzam Capital Appreciation Fund (MIRZX), another five-star Morningstar portfolio, also looks for growth stocks that he can buy at the lowest possible price. He likes champions, he says-like Teva Pharmaceuticals, "which is the largest generic pharmaceutical company in the world by a long measure."

He also likes Gerdau S.A., a global steel producer with mini mills in the Americas and Europe that is well known for recycling scrap metal in countries like Brazil, keeping control of operating leverage through vertical integration, and acquiring other concerns.

"You say, well, where is their growth going to come from?" asks Meyer. "Steel companies don't do well in recessions because of the high fixed costs. But then, when growth starts coming back, they gain tremendously from that operating leverage."

Meyer also owns Paychex Inc., a company that offers payroll services to small companies, which he believes is set to grow as the economy rebounds and more small business owners outsource. Southern Copper Corp., meanwhile, is his play on the world demand for copper and other products. He calls Canadian National Railway Company the best rail operator in North America, the one that generates the highest margins, has the best access to the seaboards and is best poised to benefit from higher fuel costs for transports, which will favor rail.

But Meyer is almost as famous for what stocks he won't invest in-companies with high stock option overhangs, ones that use their free cash flow to mop up dilution, a big problem in the tech industry, he says. "People don't realize that if you have great growth but then you dilute that growth through stock options, the share count increases and the way they fight the share count is to buy back the stock."
Apple is one he avoids, he claims, "because of its high stock option awards and big insider sales, which goes hand in hand with options. It's tough to buy when insiders are selling, even if you think it's good reasons, because they are monetizing their compensation packages. You say, 'Well, I'm not really investing, I'm buying the CFO's stock and helping him optimize his option program,' which goes against the grain."

For similar reasons he says he has avoided companies like Proctor & Gamble and Cisco. He claims his strategy, derived from the Black-Scholes method he used as a one-time accounting professor, helped him avoid AIG and Merrill Lynch before their famous blow-ups.

Joseph Milano, the portfolio manager of T. Rowe Price New America Growth Fund (PRWAX), also with five stars, agrees that there are many companies with attractive risk-to-reward characteristics that can be bought cheap, though he also thinks it requires more care in 2011. Most risk could be ignored in 2009 and 2010 because investors didn't want to miss the upside. Now he says the pendulum has swung back. 

"I'd say there are a handful of things that don't look so good," he says. "I think people need to distinguish between different tiers of growth. In the last couple of years, the companies that have had the most rapid growth are the companies that have been leveraged to the data center build-out-the 'cloud.' Things like that have gotten to what I think are fairly extreme valuations. But beneath that tier and looking at the center of the plate for growth investing, I still think there's a lot of companies that still look pretty good to me."

He says there are a lot of companies still growing at double digits, that aren't particularly expensive, trading at 12 to 15 times earnings. He likes health-care companies, for example, like Laboratory Corporation of America, which he thinks will be able to grow with the increased need for medical testing as baby boomers age and the health-care reform fallout becomes clearer (people might also finally stop putting off checkups they might have missed when they were poorer). He also thinks companies such as Western Union and futures exchange CME Group will be able to grow their earnings and aren't running at expensive multiples. He's also got big names Apple and Google, but to those he adds a few lesser-known mid-caps such as drug development services company Covance Inc., industrial equipment business Fastenal Co. and speech-based technology company Nuance Communications.

"I don't think about those as 10%-15% earnings growers," he says. "I think about those as 15% to 20% earnings growers, but I'm still paying pretty decent multiples for them."

Robert Turner, for his part, still believes Apple and Google are winners and they are still the largest holdings in his Turner Large Cap Growth Fund. He says he bought the two stocks around 2004 and that his managers are as optimistic today as they've ever been, as both companies hold huge amounts of cash-a reported $60 billion at Apple in short and long-term holdings.

"Apple could earn $25 a share this year. The consensus is moving in that direction, though it's not quite there yet. The stock trades at $344 [as of early February]. So $344 over $25, you're looking at a company that trades at 13½ times earnings. If you take out their, say, $50 a share in cash-say $300 divided by $25-you're looking at 12 times earnings. And this is a company that can grow earnings probably at 20% over the next two or three years. Google is somewhat the same way. Google this year probably could earn $35 a share, and the stock is trading at $613 [as of the beginning of February]. So you're looking at 17 times earnings, but taking out the cash, again it would be a lower valuation, maybe about 15 times earnings. So you have two of the greatest growth companies in history trading at markets where the valuations are slightly less with very visible earnings growth."

Turner says that his portfolio will seek earnings growth year over year of about 20% to 30% above that the growth benchmark. The fund has a higher P/E than the growth benchmark, but PEG ratios are slightly lower.

"We are very much pure growth," he says. "There aren't many pure growth managers left anymore. I said DDT wiped out the California condor, and two bear markets wiped out our species. But there are a few that survived, and while the California condor is making a comeback because DDT is no longer around, our breed of pure growth managers are making a comeback as well. Because hopefully we're past bear markets and economic recessions-and growth stocks are cheap."