|Which Sectors, Companies Will Continue to Benefit From the Recovery?|
By MoneyShow.com NOV 05, 2012 2:40 PM
You don't want to be in stocks where the expectations have been modeled...you want to find the companies that can still surprise to the upside when they report earnings.
Gregg Early: I'm here with Michael Sansoterra, Managing Director of Silvant Management and portfolio manager of RidgeWorth Investments Large Cap Growth Fund (MUTF:STCIX).
Michael, it looks like the recovery seems to be...it's not moving backwards, I guess would be the most realistic way to put it. The newest numbers came in and they look fairly strong. What do you see in the marketplace? What sectors do you see that are going to most benefit from this continued recovery?
Michael Sansoterra: You're right. We've seen the fundamentals of the economy continue to bump along in this somewhat slow recovery, and that continues. Unfortunately, it hasn't been enough to get folks very excited about a lot of asset classes-equities in particular-but it is still constructive and that's to your point.
The first thing you need to see is what direction the wind is blowing. The wind appears to still be blowing in slow recovery, some growth, not particularly robust; but also not rolling back over and giving investors some hope that down the road things can get a little bit better.
At Silvant Capital Management, and in the RidgeWorth Large Cap Growth Fund in particular, we are always looking for companies that could exceed investor expectations. These companies typically have good secular trends; they are growing and taking market share. They have some pricing power. They are disrupting the markets they're in.
On a company-by-company basis, we can find more of those companies right now in technology and consumer discretionary, and even a little bit in health care as well. It's not robust growth-like we said, we're in a period where it's a relatively fragile recovery, and it continues to be fragile.
There are still companies taking market share, there are still some folks with pricing power, and we want to be invested in those types of companies. Again, technology, some in consumer discretionary, and some in health care, is where we are seeing the most of those types of firms.
Gregg Early: Now, in the health-care sector, are you looking at the health-care technology aspect of it, going electronic with all the medical records? Or are you looking more in the space of health-care facilities and insurers?
Michael Sansoterra: We look more in technology. We have companies like Cerner (NASDAQ:CERN) in the portfolio.
Cerner is an IT company based in health care that helps doctors and hospitals cross-reference patient material, electronic recording of that information. That's a relatively new business, and we've had a lot of companies try to expand into this business, but the ultimate paperwork of hospitals and doctors' offices is still decidedly done manually and really not automatically. We have some of those types of companies like CERN. We're not as interested in the health-care providers because the providers may be challenged under the current set of Obamacare rules, so we are not exactly sure where that's going to shake out depending on the election.
We are certainly more focused on the companies that can take market share in the places that we know they are already competing, companies that are making drugs, in particular the generic drug business, like at a company called Mylan (NASDAQ:MYL).
Mylan is the largest United States generics company, and it has been slowly but surely taking market share in generics. The cost of name-brand drugs and the cost of health care have been quite high, so this is a long-term secular play.
At the same time, what we have seen-particularly in Europe-is very low generic penetration. The United States is closer to over 50% penetrated, so that most of the drugs that get prescribed in the United States are generic (and have an opportunity to be sourced by a company like Mylan), whereas Europe is a lot closer to 20% to 25% penetration.
We believe that the recession in Europe may actually help companies like Mylan gain some market share, and as Europe starts to slowly realize they need to save costs in health care or prolong their own economic pain. The answer is company-specific. We don't own a lot of the health-care provider services companies right now, but we do have some tech, we do have some specific plays. We own Allergan (NYSE:AGN). Allergan, which is the Botox and lap-band company, a lot of cosmetics, and medical usage firms. Allergan has been growing pretty nicely.
We own Lexicon Pharmaceuticals (NASDAQ:LXRX). It's a blood drug company. They have a very expensive set of drugs that address some very specific, rare, and deadly blood diseases. There are places in health care that are very company specific, but we don't own a lot of the hospitals or insurance providers.
Gregg Early: I noticed that you're underweighted customer staples but overweighted customer discretionary. In this kind of economy, I would almost think the opposite. What's your view there?
Michael Sansoterra: The staples companies that we own we believe will continue to exceed investor expectations and take market share. The problem is that a lot of the staples companies are relatively expensive for their growth rates.
There are a lot of people hiding in staples from an investor standpoint, and we don't typically do that. We don't believe the economy is so bad that there is no return opportunity in other sectors...you may just have to take a little bit of risk to get that return.
So in staples, when we look across the board and we look at some of the Mega Cap stocks, we see they're pretty expensive for their growth rates and the places where we'll own those companies, be it in a Monster (NASDAQ:MNST) or be it in a Philip Morris (NYSE:PM) or an Estee Lauder (NYSE:EL), there are some companies that we think will continue to do well. In discretionary, however, it is very much the haves and have-nots. The companies that are doing well in consumer discretionary and that are getting a portion of the consumer wallet-now remember, the consumer wallet is still down pretty big from the peak, so we are seeing less spending-the companies that are winning and taking market share, be that an Under Armour (NYSE:UA) or Starbucks (NYSE:SBUX), there are a handful of companies that are doing a pretty good job of growing their revenue and earning better than investors have believed they could. And they are really doing that at the expense of a lot of other companies; in some instances better than staples.
We can look at customer discretionary and we can look at customer staples and put them together and say, are we about where we want to be? The reality is it is always company-specific.
What kinds of companies do we think we can find that are exceeding investor expectations and doing a good job? And in staples proper, a lot of that, we think, is priced in. Not a lot of surprises really going forward.
Gregg Early: Wow, interesting. That rifle approach, I can see where the trends as the green shoots come up that you have much more upside opportunity there. Where the flight to safety with the staples has run its course.
Michael Sansoterra: We think so. Which is not to say that the large beverage companies don't do well...I just don't think they surprise. We want to be positioned in the places where investors haven't sorted it out in its entirety.
Stock prices go up when the expectations are wrong, and I think a lot of the companies in staples have been pretty well modeled, pretty well understood, and are carrying pretty decent premiums for their safety potential.Editor's Note: This article was written by Gregg Early of MoneyShow.