Going for growth: Large-cap buys
Money manager looks for double S&P growth rate
By Don Scott, CBS MarketWatch
Last Update: 2:31 PM ET Feb 21, 1999
NEW YORK, NY (CBS.MW) – Successful money manger David Alger,
who's been buying and selling stocks for 30 years, says the most
important factor to focus when looking for good stocks to buy is the
company's growth rate.
"We have a large research department, about 20 people in our analytical
department and they're looking for companies which are growing
anywhere from twice the rate of the S&P, which we define as about 15
percent in earnings, on up and that would become the minimum
expectation to qualify as a growth stock for us," he said.
Alger co-manages 10 funds with a strict
growth-only approach. Six of the funds focus solely
on large cap stocks. Among those, the Alger
Growth Fund (AFGPX) (800-992-3863) is
representative of this approach. The Morningstar
Principia Pro database reports the fund's 52.4
percent 12-month gain through Jan. 31 puts it in the
top 5 percent of all large-cap growth funds. Going
into this week, the fund was up 4 percent
year-to-date.
Going for growth
Alger says he's "looking for these growth stocks in
all different industries although typically we
concentrate and have an above market weighting in
technology, health care, and other groups that are
fast growing."
The average weighted annual growth rate of the
companies in the Alger Growth Fund is 27 percent.
Alger says he looks at a whole range of different criteria, such as "what
multiple has the stock sold at in the past, relative to the market. Now the
S&P's at 26 times earnings, so if you've got something that's growing
twice as fast or three times as fast as the S&P, I don't blanche at 40, 50
times earnings, because on a relative level it's really not that high." S&P
futures
He checks out where a stock is trading relative to its peer group as well.
"And then, lastly, there's a little sort of alchemy, gestalt, seat of the pants
thing thrown in there when we try to figure out whether a valuation is
adequate." And he doesn't put much stock in "EBITA, assets, cash flow
or multiple of dreams."
Stock universe divided
Alger also broadly divides his stock universe into two categories. One
includes companies with high unit-volume growth. The other, those that
are going through a "life cycle change, a company which has been
formerly inert, which suddenly gets a burst of energy, change of product,
change of management, change of industry and from that change, a high
level of growth is developed."
"We look at each stock, stock by stock as a bottom up stock picker and
we do take into account valuation. We are willing to accept higher
multiples than a lot of people. We're willing to trade off a high multiple for
very high or very predictable growth."
Which stocks are people overlooking now that would be buy candidates
in Alger's book?
"Well, I think America Online (AOL), having given up some, is attractive
and does have earnings. I think Amazon.com (AMZN), having given up
55 percent from its high, is very attractive." In fact, Amazon.com falls
under the exception to the rule category since it fails to meet Alger's
normal growth pattern. "We think that's a choice the company's making,
that basically their earnings are reduced by their very high marketing
expenses."
Other favorites are Home Depot (HD), Intel (INTC) and Pfizer (PFE).
One of his lifecycle change stocks is becoming a high unit growth story.
It's Tyco International (TYC). "I say that it's been a lifecycle change
because it's made itself over from a fairly small producer of alarm systems
and a few other things into a very well diversified, well-structured,
multi-industry company which dominates its industry segments."
Alger sticks mostly with U.S. stocks, but he will pick up an occasional
foreign holding if he sees growth or growth potential. A current example is
Ericsson (ERICY). "That's a good life cycle change because that's a
company that's had a very ‘me too' product line, and now is coming out
with some very good products which looks like it's going to move to the
head of the class."
Where are large caps and the broad market going?
"I think we're headed up," Alger says without a moment's hesitation. "I'm
very bullish. I think the market's in excellent shape. I mean you've got a
comparatively strong economy, we don't know how strong, but
comparatively strong, we've got full employment, we've got very low
inflation, the (Federal) budget is in balance, with a few minor hiccups we
have peace in the world, corporations are highly productive, so I think the
good aspects of this business certainly outweigh any of the bad."
The bottom line for Alger is Dow 10,000 by March 31 and then after a
further cut in the Federal Funds rate later in the year, he see Dow 11,000
by year's end.
So the environment doesn't get much better for stocks than it is right
now? "It doesn't and I think people loose site of that and when you've
been doing this for 30 years, as I have, you kind of realize how good this
period is compared others."
Alger Growth Fund top 10 holdings as of Jan. 31, 1999:
1.Tyco International (TYC)
2.Home Depot (HD)
3.Waste Management (WMI)
4.Wal-Mart Stores (WMT)
5.MCI Worldcom (WCOM)
6.Pfizer (PFE)
7.IBM (IBM)
8.Warner-Lambert (WLA)
9.Microsoft (MSFT)
10.Intel (INTC)
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