Capital Improvements

In today’s market, high value growth companies with sustainable earnings are the best bets, according to Michael Manns, senior vice president and senior portfolio manager at Phoenix Investment Partners’ Engemann Asset Management in Pasadena, California. Manns and his team of industry analysts identify firms that they believe will grow faster than the broader market. In their estimation, companies with strong revenues and earnings growth, independent of economic variables, offer the greatest potential for investors. “Once we find an attractive investment idea, we perform a test that indicates what we feel the economy will be doing to make sure we aren’t deluding ourselves,” says Manns, who measures his performance against the Russell 1000 Growth Index.

That philosophy has led the money manager to focus on solid performers that benefit from an increase in corporations’ capital spending as CEOs gain greater confidence in their companies’ ability to generate profit. “Over the last few years, corporations actually underspent,” says Manns, “so they need to replace capital goods to generate earnings. After 9-11, companies were unsure about the pace of business so they decided to be restrained. Now they have greater visibility.” That period of restraint, Manns maintains, allowed large corporations to build up cash reserves on their balance sheets. He expects them to begin applying those dollars in 2006.

Manns’ first selection is General Electric Corp. (NYSE: GE), the Fairfield, Connecticut-based conglomerate that produces an array of products such as jet engines, medical imaging equipment, and appliances. GE also maintains a colossal presence through its broadcast television and cable interest, NBC Universal Inc. Its affiliate, General Electric Capital Services Inc., offers financial services products.

“I like GE a lot because of our positive bias toward capital spending,” Manns says. GE can benefit from a number of spending initiatives, he says, including government improvements of railroad infrastructure or a company’s decision to boost its power capability.

As for technology, Manns is betting on San Jose, California-based Cisco Systems Inc. (NASDAQ: CSCO), which manufactures products that connect computer networks, enabling users to share Internet access and transmit voice communications. It also produces security and storage products for information systems. The recent trend of companies reducing costs by transferring telephone service to the Internet should significantly increase Cisco’s revenues, Manns says.

Manns also likes Danaher Corp. (NYSE: DHR). Similar to GE, Washington, D.C.-based Danaher is an industrial company that develops electronic test tools and calibration equipment, water quality instrumentation, dental products, and specialty tools. “This is another instance of capital spending,” Manns explains. “Danaher is a company that has a wide array of products in various distribution channels.”

Boston Scientific Corp. (NYSE: BSX) is Manns’ one pick outside of his capital spending focus. The Natick, Massachusetts-based company manufacturers cardiovascular, endosurgery, and neuromodulation medical devices. It expanded its product line by buying Guidant Corp. for $27 billion, becoming one of the world’s biggest developers of cardiovascular devices. Boston Scientific also sells products that allow blood to circulate freely and regulate heartbeats. “Cardiac defibrillators should be able to generate growth going forward,” Manns says.

MICHAEL MANNS Stock Picks