Don’t call it a comeback, but technology stocks were a standout in 2007. Consider that the tech-laden NASDAQ composite index closed the year up 9.8%, its best finish in four years. This well outpaced the S&P 500, which rose just 3.5%. And in the eyes of Eugene Profit-who oversees some $1.4 billion in assets for his firm, Profit Investment Management in Silver Springs, Maryland-tech has the stamina to keep climbing. That’s promising given the fact that tech stalwarts have made impressive moves. Witness that shares of Google and Microsoft were up 71% and 20%, respectively.
Profit, in fact, has boosted his position in tech stocks to about 24% for the portfolios he manages for government and private-sector pension funds, as well as the Profit fund (PVALX). Some of his largest stakes are in Cisco Systems (CSCO), Intel Corp. (INTC), and Western Digital (WDC). In 2007, the Profit fund rose 9.0%, and posted a five-year annualized return of 13.5%.
Given the seismic rumblings of late, what lies ahead?
We’re
nervous in the short term. The housing slowdown is having more impact than a lot of investors thought initially and the credit crunch’s casualties seem to reach beyond home financing into private equity deals. Commodity costs are high-especially the price of oil. A very large share of corporate profits come from overseas, and growth has been soft. The Fed has started lowering rates, but we probably won’t see the full impact of the moves for another 12 to 18 months. In all, we have a prescription for a pretty weak economy. That doesn’t mean the stock market will be down over the next 12 months, but that said, we’re a bit more contrarian than many.Your weighting in tech seems to indicate corporate spending will remain strong-what’s your take on the sector?
You usually want to hide in consumer staples and healthcare companies in a market like this, but there are some compelling reasons to be in tech. Yes, there are concerns that consumer spending will drop off.
As growth managers, how do you balance your expectations for bottom line gains with stock prices?
We say we’re valuation-sensitive growth investors. Right now, our stocks on average have a projected three-year annual growth rate of 12% or more. We aim to invest in shares that have a price-to- earnings multiple that is below 1.5 times the company growth rate. That way, we try to buy into a company’s growth at a reasonable price-within limits.
What’s a good illustration of this approach?
We’re bullish on Jabil Circuit (JBL), a semiconductor chip company. Jabil’s circuits are used in cellular phones and products put out by Nokia, Boeing, and Cisco. Circuit makers have been under pressure because of the perception that they are
Is there a healthcare name that has caught your attention?
A stock that’s somewhat more controversial is Celgene (CELG), a biotech firm that sold sharply off of 2007 highs (above $70 a share) to around $50. The company has had a rough go in recent months because its multiple cancer drug, Revlimid, came under competitive pressures. We believe Wall Street overreacted and that the rival drug may have higher toxicity overall. In biotech, these types of quick blips provide very good entry points. We think the stock has an annual growth rate of more than 40%. It trades at a price- to-earnings multiple of 32 and our target price is $72.
How about a pick in more traditional businesses?
Whole Foods Market (WFMI) sells organic foods and private labels and has been very profitable. Still, the stock has been driven from the $70 a share range in early 2006, down to about $40 by the end of last year. Wall Street was concerned about its acquisition of a competitor and an investigation that it might violate monopoly regulations. The takeover was approved, but Wall Street hasn’t gotten back to the important parts of the Whole Foods story. With the number of food and contamination scares in the news, we think the company stands to benefit from growing customer loyalty. Whole Foods has seen a 20% growth rate slow to about 13%, but that’s still a substantial number. And with the stock trading at a price-to-earnings multiple of 22, we think shares can reach $57 in 12 to 18 months.
Profit’s Picks
| Â | Â | 52-week Price Range | Â | Â | Â | |
| Company (Ticker) | Price | Low | High | 2009Est. EPS | 2009P/E Ratio | Comment |
| Celgene Corp. (CELG) | $49.61 | $41 | $75 | $1.53 | 32.4 | The biotech outfit’s cancer drug looks to stave off pressure from the competition. |
| Jabil Circuit (JBL) | $13.90 | $13 | $28 | $1.33 | 10.5 | Minimal exposure to consumer spending means Jabil is priced at bargain levels. |
| Whole Foods Market (WFMI) | $35.64 | $34 | $54 | $1.41 | 25.3 | America’s pickier about what’s in the cupboard, so Whole Foods stands to generate a loyal following. |
Data as of 1/08/08 Source: Yahoo Finance!