Stock picking when market pulls back
AIM fund managers look for 'names' hit by downturn
By Don Scott, CBS MarketWatch
Last Update: 1:32 PM ET Aug 3, 1998
NEW YORK (CBS.MW) -- Finding large cap stocks that have a shot at
making your portfolio grow is becoming a daunting task.
It's a challenge, too, for long-term investors like Claude C. Cody, IV and
Craig A. Smith, key stock pickers for the AIM Balanced Fund. Yet,
they've risen to the occasion rather handsomely over the last several
years.
If you look at the fund's performance
through the end of June, you'll find it
in the top fifth of all balanced funds.
According to Lipper Analytical
Services, the fund saw a 21.7 percent
return over a one-year period; a 22.8
percent annual rate of return for a
three year period; and, a 17.0 percent
annual rate of return over 5 years.
That's a lot better than the average
balanced fund, which for the same
period, posted 17.58 percent (1
year); 17.82 percent annualized for 3
years; and, 13.97 percent annualized
for 5 years.
'Over-diversified'
Cody, Craig and two colleagues manage $1.875 billion in The AIM
Balanced Fund's A,B and C shares. The fund carries a maximum sales
charge of 4.75% on the A shares and the B share have a contingent
deferred sales charge.
The fund is 60 percent in stocks and 40 percent in bonds. Of the stocks,
roughly half are large cap issues, 30 percent mid cap and 25 percent small
cap.
"Seventy percent of the fund has a growth rate of 21 percent, and a PE of
about 17," says Cody, "That's a pretty good combination of growth and
valuation."
Cody and Smith also point out that the portfolio is "over-diversified" in
stocks, with over 200 different issues. They like to own a lot of
companies in order to "let the process work." Another benefit of being in
so many stocks: "no individual name is a performance breaker."
Buy strategy?
"We look for good, strong, sustainable earnings growth," says Cody, "For
instance, BankAmerica (BAC) has a very good franchise and a solid
growth rate of about 15 percent."
That solid franchise is another important factor. They focus on strong
brand name franchises.
"We've been selectively adding to names in our portfolio in the recent
market pullback," says Craig Smith. Although they usually don't like to
talk about specific individual stocks, MarketWatch asked them what their
three favorite large cap stock picks are at this point in the market cycle.
"We look for strong franchises, a world recognized brand name, a
company like Disney (DIS)," says Cody.
He points out that from time to time "cross-currents" impact a company
like Disney. For instance, you may hear that theme park attendance is
down. Or a particular movie didn't do as well as analysts had hoped it
would. "So the stock sells down on these reasons and we try to use those
times to build our positions," says Cody.
They say Disney is a premier brand in entertainment and long term
earnings growth is running about 17 to 18 percent a year. "The only time
Disney has looked cheap over the last few years," says Smith, " is when
investors perceive there's some kind of problem."
The stock's PE is in the mid-thirties and they believe Disney will earn 97
cents a share in FY '98 and $1.15 in FY '99.
Drug companies
"We also like the large drug companies," says Smith, companies like
Warner Lambert, Bristol Myers (BMY), Merck (MRK), Pfizer (PFE),
American Home Products (AHP), SmithKline Beecham (SBH), "We own
almost every one of the large cap drug names."
Cody adds: "Everyone of them has different drugs but they all have great
brand names worldwide and all have good pipelines, some are better than
others, but all have pipelines that are coming along, even those that have
drugs coming off patents." They say they like to add these stocks to their
portfolio, too, when the shares pull back in price.
By the way, they say they owned Pfizer before Viagra came out. They
knew the drug was part of Pfizer's pipeline of potential new products and
they knew it would be good.
Cody points out that their number one holding, Quest Communications, is
a company with a $10 billion dollar market cap. It was a small cap when
they bought it. The key for Craig: "Momentum in a space that's growing.
Quest is "focusing now on signing up subscribers," says Cody, "and that
translates into higher cash flows, but since they're still building out their
system, not as much in earnings."
Dell Computer remains one of their top ten holdings despite the much
publicized problems in the computer business. Says Cody: "Dell fits into
the category of a good brand name with long term success."
Sell criteria?
It's straightforward, says Craig. "It's the flip side of the buy decision.
When a company's earnings are no longer on track, it qualifies to be sold."
If a company disappoints The Street by reporting lower earnings than
expected Cody and Craig will sell the stock, unless the reason for the
disappointment was a one-time event.
But if it looks like it's going to be an ongoing problem, the stock is history.
It's all in the earnings.
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