The fund has moved nimbly through a difficult market, rising 18.4% this year through November, versus a drop of 9.5% for the S&P 500 index. Other key points:
--Co-manager Mark DeFranco of Prudential Jennison Equity Opportunity Fund sees Monsanto (MON) as a strong agricultural biotech play
--He calls Conoco (COC) "one of the few integrated oil companies with growing production"
--DeFranco expects solid growth at General Motors Cl.H (Hughes) (GMH) from satellite operations
--The fund carries an S&P Three-Year Overall Rank of 5 Stars (5=highest, 1=lowest)
Standard & Poor's recently had an opportunity to speak with DeFranco about his investing strategy - and the stocks he's buying now.
Q: What types of companies do you invest in?
A: We hold attractively valued companies that are unrecognized by the market, but we are not deep-value investors. We look for companies with earnings catalysts in the next 12 to 18 months, such as an industry cycle upturn, a new product, a management change, or an improving balance sheet. We are basically bottom-up stock pickers, though we look at some sector trends.
Q: What are the market capitalizations of your holdings?
A: We're a multi-cap fund that goes where the best values are. Bottom-up stockpicking has led us to mid-cap stocks, because they're undervalued and not widely followed by the market. Currently, some of the best opportunities are in companies with market caps lower than $10 billion.
About 55% of the fund consists of companies with market caps of $2 billion to $10 billion, 20% is in under $2 billion companies, and 20% is in $10 billion to $20 billion companies.
Q: What areas of the market are you currently favoring?
A: The slowing economy has recently led us to the basic materials sector, where Monsanto (MON) is a terrific agricultural biotech play with great genetically modified agricultural products.
Q: Would you describe a representative holding?
A: Last year, we started looking at the hospital industry, because the federal government and HMOs were cutting hospital reimbursements. Then the government realized it had cut too deeply, and HMOs began to stress quality over price, giving hospitals a boost. One holding, Health Management Associates, a predecessor to HCA-The Healthcare Company (HCA), faced difficulties when digesting acquisitions of small rural hospitals. After meeting with the company's management, we felt it would rebound in a few quarters.
Q: What's your turnover ratio?
A: It's close to 70%, with about half due to portfolio rebalancing.
Q: What are your top five holdings?
A: Allstate Corp (ALL), Conoco Inc. (COC), FleetBoston Financial (FBF), Litton Indus (LIT), and XL Capital Ltd (XL). Most of our largest positions are between 2% and 3% of the portfolio, and no position is more than 5% of the portfolio.
Q: Why do you like Conoco?
A: Conoco is one of the few integrated oil companies with growing production, and it has great returns on equity. Most of our energy holdings will gain regardless of oil prices.
Q: Do you have any favorite stocks?
A: We like Genl Motors Cl. H (GMH), the tracking stock for Hughes Electronics Corp., because its satellite business offers great growth potential. Gerdes covers mutual funds for Standard & Poor's FundAdvisor