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."