Getting the big picture right Fund manager touts 'future blue chips' for investing
By Don Scott, CBS MarketWatch
Last Update: 12:45 PM ET Sep 28, 1998
NEW YORK (CBS.MW) -- Here's a pop quiz. Choose the key to
successfully investing in large-cap stocks:
(a) Pick companies (market cap $1 billion or more)
that are No. 1 in their industries.
(b) Invest in firms that sell low-priced products.
(c) Favor shares that are trading at a reasonable
multiple.
(d) Look for companies riding the crest of the right
megatrend and demographic wave.
(e) All of the above.
If you answered (e) you win, at least according to
the rules played by Frederick "Fritz" Reynolds,
who manages the $90 million Reynolds Blue Chip
Growth Fund (1-800-773-9665).
Reynolds' annualized return has beaten the S&P
500 Index over the past five years, three years, and
12 months through the end of August, according to
Morningstar's Principia Pro database.
Only a dozen growth funds out of 1,559 can make that claim. Plus he's
way ahead year-to-date -- up 20.4 percent going into this week -- vs. a
broad market that's gained 7.7 percent.
Future blue chips, now there's a ticket
Reynolds buys blue chips and what he believes will be the future blue
bhips.
He looks for companies that are, "well-managed with great products that
are low priced, that have great research and development, strong financial
structures and the bottom line would be a company that's number one in
its industry or dominating."
Also important is the price/earnings ratio relative to the growth rate.
Ideally he'd like to buy companies at low PEs, but he's willing to buy
companies whose PEs are up to twice the growth rate.
"Investing is probably the one industry where you suffer from information
overkill," says Reynolds. "I'm looking for a megatrend, an overview trend,
demographics, or new industries or products that are going to sell well, in
addition to ones that you can count on."
Top 10
Reynold's top five holds as of Sept. 25 are Microsoft (MSFT), Cisco
Systems (CSCO), Merck (MRK), Pfizer (PFE) and Schering-Plough
(SGP). The next five are Intel (INTC), Warner Lambert (WLA), Johnson
& Johnson (JNJ), Abbott Laboratories (ABT), and Wal-Mart (WMT).
Reynolds cherry-picks brokerage firm analysts he'll listen to, talks with
venture capitalists he knows who are involved in starting new companies
and speaks with other portfolio managers. He says it's important to first
get the big picture right, then look out two years instead of just one
quarter and "keep a narrow focus on the world's best companies."
He's 96 percent invested in stocks; 40 percent of the companies in his
portfolio sell predictable, non-durable products that we all use in our
kitchens, bathrooms and family rooms.
"There's a common thread that I've learned over my thirty years of
investing," says Reynolds. "I'm looking for companies that usually sell a
low-priced product rather than a high-priced product, companies that are
selling around the world, that are heavily branded, or that can sell a lot of
product."
Pets
Asked his three favorite stocks at this point in the market cycle, he says
without hesitation: PepsiCo (PEP), Gillette (G) and Disney (DIS).
PepsiCo: "They dominate in the salty snack foods in Frito-Lay, and then
they do a decent job in the beverage area although they are behind
Coca-Cola." (He owns Coca-Cola (KO) having bought it at 58 during
last October's pullback.)
Gillette: "It's a Warren Buffet-type stock that dominates in their industry
worldwide. Should stay No.1 Makes a low-priced product. All in all,
should be a good company for us long-term and continue to be number
one."
Disney: "Has some problems in the theme parks. They're a little slow. In
movies, there haven't been as many big blockbusters as they'd like to
have.
"And there are higher costs at the networks. But it's a leading, No. 1
company in the leisure time area and over the long pull these number one
companies work out well, particularly if you can buy them when they're
out of favor and down in price."
Health and tech
The two biggest sectors in Reynolds' portfolio are health care and
technology.
"Health is about 14 percent of the US economy and it has strong
fundamentals long-term," he says. "The demographics work, in that the
population is aging."
Core holding: Merck (MRK), which has moved up recently but "on any
pull back, I'd add to holdings in Merck."
Internet and tech
Another whole area in core holdings is growth in computer software,
technology and the Internet, says Reynolds, whose holds big positions in
Microsoft (MSFT), Intel (INTC), Cisco Systems (CSCO) and America
Online (AOL). Sure, he owns several Internet portal companies, but he
thinks Yahoo (YHOO) will be the survivor there.
How does he know when it's time to sell a company's stock?
Reynolds says the key guidepost is "if the fundamentals are going to be
poorer in the future or are eroding."
For example, he used to own a lot of Motorola (MOT), but then he
started seeing Lucent (LU) doing better in large, digital switches, and
Finland's Nokia (NOK.A) doing better in cellular phones. So he dumped
Motorola and bought Lucent and Nokia.
What's next?
Reynolds says the broad market could easily drop another 700 points, but
for the long haul, the two most important factors that drive U.S. stocks
are interest rates and the U.S. economy.
Rates are low, and his experience tells him that's good for stocks. And
"basically, the outlook for the U.S. economy is very strong, so the bottom
line is the outlook for the stock market is OK here."
Don Scott writes about big caps for CBS MarketWatch. |
