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Get Four
|  | MAY 24, 2005
Big Hopes for MidcapsPutnam Vista Fund's Kevin Divney thinks that growth stocks in this territory have "some room to outperform in the near term"For investors, it's a good year for the growth strategy, in the view of Kevin Divney, co-portfolio leader of the Putnam Vista Fund (PVISX ). He shops for quality companies with good valuations and growth potential and notes that growth-type stocks should be a good bet now, since the value strategy has recently performed very well. Divney finds midcap stocks he likes in a number of sectors, including computer software, energy (particularly oil refining), health care, and consumer companies catering to people who will continue to spend despite higher gasoline prices. He thinks homebuilding still has room to grow and, in that area, likes NVR (NVR ). One niche he points to as attractive is Internet advertising, where he names both eBay (EBAY ) and Yahoo! (YHOO ), but says he likes the whole group. Looking ahead, he sees good growth in energy and basic materials, but would avoid lower-growth consumer staples concerns. These were a few of the points Divney made in an investing chat presented May 19 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from this chat. AOL subscribers can find a complete transcript at aol.businessweek.com/chat. Q: Kevin, how do you see the broad market for now and the rest of the year? A: I think the rally of the last few days is starting to reflect the valuation that's in the market. We're trading at the lows of the p-e range on the S&P 500 [stock index]. I'd be surprised if the S&P 500 is going to be below the 1,200 level by the end of the year. Q: How have you positioned the fund to take advantage of the attractive valuations you see? A: We look for valuations, and we combine that with growth prospects and quality. This has resulted in a portfolio tilted toward computer software, energy, and especially refining. On the health-care side, we're tilted toward medical products and services and are [neutral on] biotech firms here. We've focused on the consumer side and focused on companies that cater to mid-to-higher-end consumers who will continue to spend, even with higher gasoline prices. Q: What do you think of eBay? A: On eBay, we like the whole group. You should have some exposure to anything with Internet advertising. What you need to pay attention to is advertising spending as it moves to the Internet. As this increases, Yahoo, eBay, and the like will all benefit. EBay's earnings are set to grow at 30% this year -- that's a credible number to us. Q: How has the midcap sector been doing so far this year, relative to small and large cap? And how do you define midcap? A: Our midcap strategy for the Putnam Vista Fund is to find stocks with between $1 billion and $10 billion in capitalization. We're down about 1.6%, relative to the S&P 500 being down about 1.5%. So the midcap companies have done fairly well. There's good valuation support in the midcaps, and some of the value strategies have overperformed in the last year, so you're probably going to do a little better with a growth strategy at the moment. The core benchmark of the S&P MidCap 400 is basically flat for the year. That's up 17% over one year, though, and growth up 14% over the one year. So we believe, therefore, that growth has some room to outperform in the near term. Q: Among your top holdings, why do you like Linear Technology (LLTC )? A: We like Linear because it has three of the main categories we look for. Valuation relative to competitors is excellent. As far as quality goes, they execute very well. They generate real cash flow. The earnings visibility for Linear is also better than their competitors'. Relative to technology and semis, it's quite solid. It's down somewhat for the year, but we believe it's positioned well to rally. It is one of our top 10 holdings. Q: Do you think Symantec (SYMC ) will bounce back once the aura of Microsoft (MSFT ) penetrating the sector has settled in? A: We're very favorable on Symantec. We think the merger with Veritas (VRTS ) makes sense. We've held the stock for some time and are a little surprised at the underperformance recently, but we're holding on for the long term. Two marketplaces they can address is spending from both the enterprise and the consumer sectors. The Veritas model helps protect them on the enterprise side over the long run. Q: Which companies do you like in the medical products and services areas? A: Within medical products, Dade Behring Holdings (DADE ) is a favorite. They have products in cardiac diagnostics -- lower-end products. They aren't the fastest grower, but are one of those nice, boring companies whose stock continues to grow. We've owned them for quite a while. Another we like is Edwards Lifesciences (EW ). They have a lot of products that treat cardiovascular diseases in their late stages, and their products complement a lot of common procedures these days like angioplasties. Another we like is Respironics (RESP ). They have devices that help people breathe when they sleep (chronic obstructive pulmonary disease patients, etc.), as well as products for newborns and the like. They're trading at 28 times earnings, 17 times next year's. We own it, and still think it looks attractive. Q: How exactly do you figure out how to buy a stock? Do you meet company managements? A: We do several things. We do meet with managements -- we try to understand their strategy. We look at what they've done historically, based on returns on capital, growth, etc. We try to reconcile what they've done in the past with what they plan to do in the future and then try to figure out how that fits with valuation. Combining this with overall quality is how we come up with our final decision. Q: Do you like anything in financials? A: Our strategy, although there are attractive yield stocks out there, is to make money on capital appreciation. We'd look at Capital One Financial (COF ), growing quickly relative to peers on their credit-card asset. We also own Providian Financial (PVN ), which is similar to Capital One, but a little more aggressive on some lending practices.
BW MALL
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