Blue-chip stocks, particularly those of companies whose earnings have held up well during the recent economic downturn, are available at bargain prices that Larry J. Puglia says he hasn't seen in several years.
"You don't have to pay any premium" for companies like Citigroup and Home Depot, said Puglia, who runs the US$5 billion T. Rowe Price Blue Chip Growth fund. While these favorites "have low price-earnings multiples," he said, "we consider them growth companies because they have shown durable, sustainable earnings growth."
The fund has held up better than many of its peers in the large-growth group but has still lost money recently. It declined 16.3 percent a year, on average, for the three years through Thursday, compared with losses of 24.8 percent, on average, for all funds that buy large-growth stocks and 15.9 percent for the Standard & Poor's 500-stock index, according to Morningstar Inc.
The fund lost 22.4 percent in the last 12 months, versus losses of 24.4 percent for its group and 22.8 percent for the index.
Puglia, 42, who is based in Baltimore as a vice president of T. Rowe Price Associates, the fund's adviser, also manages about $2.5 billion for institutions.
He picks the fund's 125 or so stocks mostly among US growth companies with market capitalizations of at least US$5 billion. The projected earnings growth rate of the portfolio companies averages 14.8 percent for the next 12 months, compared with 13.2 percent for the index.
In choosing stocks, Puglia screens for accelerated growth in per-share revenue, earnings and cash flow over the last one, three and five years and projected growth during the next three and five years. More possible purchases are found through visits with companies' managers. He said the meetings give him a "high degree of confidence that management has conservative operating plans that they achieve using conservative accounting."
He also looks for what he calls "franchise businesses" with leading competitive positions, seasoned management and strong return on invested capital.
Citigroup, the financial services giant, is the fund's biggest holding, at 4.1 percent of assets. The company has an excellent balance sheet and shareholder-oriented management, Puglia said.
A week ago, Sanford I. Weill, the company's chairman and chief executive, withdrew his name from consideration to be a director of the New York Stock Exchange. Eliot Spitzer, the state attorney general of New York, opposed the nomination, saying it was inappropriate after Citigroup had agreed to pay US$400 million in fines and other payments as part of a settlement to end an investigation into conflicts of interests among stock analysts.
Puglia said these problems "will have no influence on the company's long-term success." Its profitability held up well during the recent economic downturn, he said, because management had assembled a group of companies with strong product and geographic diversity.
Citigroup's shares trade at less than nine times projected 2004 earnings, he added, inexpensive for a global brand. He said the company should "benefit from the global economic rebound which we believe will slowly emerge in late 2003 and 2004."
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