Per my statement about the market wanting to take high p/e companies down a bit:
nytimes.com
<<Karen E. McGrath, manager of the Strong Blue Chip 100 fund, grew up on a farm, where her family's philosophy was not to put too many eggs in one basket. So it is a comfort to her that the fund's $425 million in assets are divided between two portfolio strategies.
Half of Blue Chip 100 is invested in 20 to 25 companies from among the 100 American stocks with the largest market capitalizations -- those that she judges as having the best prospects.
The other half is an index portfolio of those 100 large-cap stocks, aimed at keeping the total portfolio from withering if her stock picks hit a dry spell. "It's there to reduce the volatility of the concentrated portion," Ms. McGrath said.
Every day, she uses cash flows and reserve cash to maintain the balance between the concentrated and indexed halves of the portfolio.
But the Blue Chip 100 is not diversified in the conventional sense. In some ways, its investors are buying a large-cap index fund with booster rockets. (Strong Funds, the fund's adviser, declined to break out the performance of the two halves of the portfolio.)
Of course, large-cap growth stocks have yielded bumper returns recently. Since its inception in July 1997, the Blue Chip 100 has returned 30.3 percent, annualized, through May 28, versus 23.8 percent for the Standard & Poor's 500-stock index and 25 percent for the average large-cap growth fund, according to Morningstar Inc., the Chicago financial publisher. "I have to admit, I didn't anticipate this kind of extraordinary performance," Ms. McGrath said. "I had the wind at my back."
But this year, the fund's lead has narrowed as large-cap growth stocks have lost their luster. Through May 28, the fund was up 5.9 percent, compared with 6.3 percent for the S&P 500 and 5.2 percent for large-cap growth funds over all.
"There will be moments when you need to rest," Ms. McGrath said. "I think with these companies, as they rest, the earnings catch up and interest returns to them."
Ms. McGrath, 61, also manages portfolios for retirement plans and wealthy families. Composite returns for her growth-stock accounts averaged 31.2 percent annually over the three years ended March 31, according to Strong, compared with 28 percent for the S&P 500.
She calls herself a long-term investor and likes companies with projected earnings growth rates that are greater than the market's over the next three years. And while she is willing to pay more for shares of companies with superior earnings estimates, she shies away from those with what she considers "inflated" price-to-earnings ratios -- too far above the market average to be justified by future earnings growth.
"Since the first of the year, I've sort of taken my foot off the accelerator," she said. For example, she has stopped adding to her positions in some high-P/E, high-growth stocks, like Microsoft. "There are many of them that I like," she said, "but I have been waiting to buy them at somewhat better prices." And she is quick to sell if a company's earnings fail to fulfill expectations.
Since the fund's inception, Ms. McGrath has kept a position in Worldcom, now MCI Worldcom, in the concentrated, actively managed portion of the fund. "This is among the best-positioned companies in the telecommunication services industry," she said. "They have put together their own network for full service of voice, data and Internet, and on a worldwide basis."
She said she expects continuing revenue growth of about 18 percent a year for the company, with net profit margins, which are currently negative, improving. She estimated annual earnings growth of 35 percent over the next three years.
Her first purchase of Worldcom was at $31 a share in July 1997. MCI Worldcom closed at $89.75 on Friday, and she thinks it could hit $115 within a year.
Ms. McGrath bought Chase Manhattan shares for the actively managed portion of the fund in October 1997 at $60. Chase now trades at $74.3125, "and I would think a target of around $100 would be reasonable over the next year," she said.
She expects annual earnings growth of about 13 percent over the next three to five years for Chase, which she praises for concentrating on its core financial services business.
"It's a very strong and conservative management that I like," she said. "They'll be careful and not pay too much for an acquisition, and they'll be sure that they have completed the integration of what they have done in the past, not overwhelm themselves with too many acquisitions."
Ms. McGrath is bullish on technology, too. She bought Texas Instruments, the semiconductor giant, at $64 a share in November. It is now at $118.875; her target is $130 in a year.
In particular, Ms. McGrath is happy that Texas Instruments is not a major competitor in the hotly contested computer chip market and is instead focused on "digital signal processors," chips used widely in wireless telephones, disk drives and communication equipment.
Ms. McGrath says the slump in the semiconductor industry is ending. "We're coming out of that cycle," she said. She estimates earnings growth of 20 percent a year for Texas Instruments in the next two years.>>
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