Large Cap Growth Stocks
Interview: State Street Research Large Cap Growth Fund---Dowd, Ed---Fund Manager
>> the maker of fat boy and softtail motorcycles said first quarter profit rose nearly 10%. that’s right. net income at harley davidson. $204 million. that works out to 68 cents a share. revenue was up almost 5% on record demand for those just seen motorcycles. and the milwaukee-based company has seen at least 20% annual profit gain for six straight years. as it gains market share from rivals. the company says that it expects to build 400,000 harley s a year by 2007. our next guest says that this year may prove to be a strong one for large cap growth stocks. in part due to a pickup in capital spending. as we saw with texas instruments earlier this afternoon. and which boosted its capital spending forecast for the year. and ed dowd is a portfolio manager overseeing large cap growth stocks at state street research and joins us now from their boston offices with his insights on the market . so we just mentioned texas instruments. it’s a large cap growth stock. will it find its way into your portfolio? it’s not there already?
>> we had it earlier last year. and actually we just sold it recently. we took some profits in the stock. and we’re looking for other stock with a little more upside leverage at the moment.
>> such as?
>> we just recently added to linear technology. which is a stock that we think is going to accelerate and actually they reported today as well. and they had phenomenal earnings. they reported 12% sequential growth. and guided 12% sequential growth for next quarter as well.
>> now, we probably got a little ahead of ourselves here. in general your theme is large cap growth. and --
>> that’s correct.
>> that is a―amid a backdrop of economic jitters, terrorism jitters, rate jitters, am i right?
>> that’s correct.
>> why large cap?
>> i think large cap will benefit from a recovery in the capital spending cycle. if you think about what happened last year with an earnings recovery, a lot of companies, they had cut a lot of costs. and the consumer actually helped drive a lot of the revenue growth and recovery in stocks last year. this year we expect to begin capital spending. we are starting to get some early evidence of that. companies like dell are seeing some of the corporate spending happening. linear tech said on their call they’re seeing a broad based recovery. especially in the industrial segment. and linear themselves are actually increasing their cap-ex and hiring people. so i think this is the kind of thing we’re going to see all throughout the year. large companies and mid-sized companies adding to investments and people.
>> there would be some investors who say well, it’s about darn time. over the last 12 months as this graphic on the bloomberg shows, the large cap stocks, the yellow line here, have underperformed by about 50% their mid cap brothers and sisters, my bloomberg guys. and the yellow line, 27% for the s&p, 43% for the mid cap index. and the russell 2000, up double, 54%. so why are we going to see this reversal? that’s a lot of catching up to do.
>> absolutely. and the last three years have been absolutely horrible for large cap stocks. as a combination of overvalued. and they started to miss earnings estimates and ned to cut a lot of costs. and there was a lack of business spending. cost cutting has occurred. devaluations are much more reasonable and the earnings estimates on wall street are probably too low. and we think going forward a lot of large cap stocks are going to start to show some top line acceleration.
>> is it a growth story like top line acceleration? or sales growth? or is it one of sort of safety in uncertain times or both?
>> a growth top line story. and i don’t think people should get too concerned about inflationary fears or interest rates rising. and interest rates rising probably is going to mean this economy is growing very well. and here at state street research we focus on bottom up fundamental stock analysis. so we go stock by stock and look for companies exceeding estimates going forward. and we are finding a lot of them right now.
>> my next question was how long before investors can learn to live with the idea of rate hikes? clearly there is always some disaster scenario in the marketplace and panic when there is the threat of rate hikes. but smault―but ultimately you are seeing we can live with these rates as long as we can get a handle on them.
>> that’s right. and how high they go and once they get comfortable with that and the fact that rates are going up, because of growth, not because of inflation, something we are talking about right now, but i think over time, we’re going to see revenue growth. and that will be a good thing.
>> i should have been specific. equity investors can learn to live with the rising rates. >> absolutely.
>> and move on with it. that was implied. 30 seconds. tell me why you like interactive corporation. barry diller’s company?
>> barry dill diller’s―barry diller’s company is a travel company. it has outperformed because of concerns about margin erosion. the company bought in expedia and hotels.com last year. merged them together. and then went on a campaign to brand and many to spend a lot of money on advertising. concerns were that margins would go down. we think those concerns are not as well founded. we think that travel internet business is on fire when they report this quarter or next one margins will have the potential to expand.
>> we like it. we like fire. state street research. portfolio manager, thank you, sir. stay with us. more coming up after the break.
