4.4.20Midcap stocks
Interview: State Street Research---Leary, Eileen---Portfolio Manager
>> microsoft agreed to settle an antitrust lawsuit filed by minnesota consumers. the company could have faced costs of $1.3 billion if it lost the case. the minnesota suit claims microsoft’s windows operating system monopoly drove up the price of software for consumers in that state. the state sought millions of dollars. the settlement comes amid a trial, the first ever for a consumer antitrust suit against microsoft. the company has settled similar suits in 10 states for $1.5 billion. computer associates fired nine employees in its legal and finance departments. the move comes after former chief financial officer ira zar and two other officials pleaded guilty to securities fraud. computer associates has been targeting workers implicated in the fraud after a two-year securities and exchange commission probe. the company says it booked some sales too early. it’s been the subject of a proxy fight over its management of lawsuits, claiming chief executive officer kumar and other officials hid bad news. our next guest is bullish on energy stocks and has been adding to biotech positions recently. she manages close to $1.5 billion in period midcap growth stocks. eileen leery of the state street growth fund joins us from boston, massachusetts. happy patriot’s day, thanks for coming in. talk to me about midcap stocks this year. we’ve been talking about how they’ve outperformed. i put together a 12-month comparison on the bloomberg, small versus medium versus large. the middle line, the orange line in between. the orange line in between, 42% higher in 12 months. that’s the midcap, russell 2000 on top, the white line and the s&p 500, 27. just to set the stage, do you think, eileen, that the midcap stocks will outperform again this year?
>> relative to the s&p, we do think that midcap stocks will continue to work well this year. we think the earnings leverage they have going into this year and earnings reports will be strong.
>> why? why will they outperform the s&p 500?
>> we still think there’s quite a bit of opportunity in these companies that are getting larger that can grow into large cap stocks. there’s quite a bit of demand in the midcap area, the $3 to $5 billion. we buy stocks all the way from $1 billion up to $10. so it gives us a broad range. the companies can grow faster and in the environment of potentially rising interest rates, the higher growth companies i think can do better in a market environment like that.
>> some would say the uncertainty of rising interest rates would send people to more predictable earnings, to the larger cap companies, the ones that steadily crank out profits.
>> that’s, i think initially. but longer term, you’re going to need the growth to offset what’s going on with interest rates and the p.e.’s can be sustained with higher growth companies, we believe. so i think eventually you’ll come back to the quality growth companies.
>> if you look at the midcap index, there’s 129 groups making up the index. year to date, hotels, casino, home entertainment and apparel retailing the top four and just beneath that, oil and gas pops on to my screen which fall into the realm of energy stocks which you think in the second half will be leaders in the midcap if not the broader markets ?
>> we like energy names despite my view of strong market fundamentals, which is contract to having energy work. we’ve been overweight energy for a while and the stocks continue to report strong earnings. we think the supply-demand fundamentals are very positive for the industry both for natural gas, oil, as well as coal, which we’ve added a few names there recently.
>> we talked earlier about biotech stocks and telecom leading the way. biotech also one of your favorite picks. it’s getting harder to differentiate between biotechs and pharmaceutical companies. but tell us what it is about biotech in the purer sense that you see as a profitable situation.
>> we really manage this portfolio at state street research from a bottom’s up basis. the biotech stocks we’re using are stock specific choices, not general biotech. that part of the market has been strong lately but we own biogen idec and elan for a new drug that could be coming on the market before year-end. it was a surprise to the market this year that we don’t think is fully reflected in those companies. there’s a lot of great research going on in the cancer area and those stocks have been working lately. we own millennium pharmaceuticals, taking great market share. so we think that area can continue to work.
>> elan is a turnaround play, new management in there. they had a major controversy. your rating and your thoughts on how the new management is doing.
>> we think management is doing pretty well. we’re particularly excited about the new drug, antegren in the treatment for m.s. to be filed by the middle of the year and potentially approved by year-end, a year earlier than expected. these guys seem to be getting their act together. they have an s.e.c. investigation which we hope wraps up soon but it is a new management team and many of their troubles are in the past. thank you.
>> thank you, eileen, sorry to cut you off. she’s can state street research midcap growth fund. stay with us.
