After a poor start to the year, the U.S. stock market has picked up lately, and fund managers Christine Poole and David Cooke expect further gains before year-end.
Ms. Poole, director of U.S. equities at Scotia Cassels Investment Counsel Ltd. in Toronto, and Mr. Cooke, a senior portfolio manager, run Scotia American Growth Fund, which is up 1.64 per cent so far this year. The $220.8-million fund has a checkered record, down just under 5 per cent in the 12 months ended June 30, down 4.73 per cent annualized over three years but up 5.1 per cent annualized over 15 years.
"We still think there is further room for price appreciation" in U.S. stocks before year-end, Ms. Poole said. But given the uptick over the past few months, "we wouldn't be surprised if there is a bit of a pullback post this earnings season."
So they've adopted a slightly defensive position. The fund has a higher-than-market weight in health care and consumer staples, two sectors that lagged in the latest rally. It is basically market weight in energy, underweight in financials.
In selecting stocks, the managers follow a growth-at-a-reasonable-price style. They use a proprietary screening process -- giving each stock a score for quality, valuation and risk, and then an overall score -- to pick potential candidates.
Among their choices is Aetna Inc. (AET-NYSE). The Hartford, Conn.-based company offers health, dental and drug benefits to more than 14.4 million Americans. The managers are drawn to the stock by Aetna's continuing membership growth, new services, improving efficiencies and a slowing rate of increase in health care costs. "Also, stock buybacks and continued debt reduction, as well as potential dividend increases, support stock appreciation," the managers said. In addition, they note that Aetna shares are trading at lower price/earnings multiples on 2005 and 2006 consensus share profit estimates than are stocks of its peer group. Aetna ended yesterday's session at $76.99 (U.S.) on the New York Stock Exchange.
The managers also like CVS Corp. (CVS-NYSE) of Woonsocket, R.I. CVS lept to top spot among U.S. drugstore retailers by acquiring more than 1,200 Eckerd stores in the southern United States last year. The managers see significant potential for CVS to improve Eckerd operations. CVS, which occupies the No. 1 or No. 2 spot in more than 75 per cent of its markets, also stands to benefit from favourable secular trends in the industry, including demographics supporting pharmacy sales growth of 8 to 9 per cent a year. The managers see the shares, which closed yesterday at $29.81, as attractively valued on a P/E basis relative to their peers.
Outback Steakhouse Inc. (OSI-NYSE) operates and licenses casual dining restaurants and is branching out from its flagship Outback Steakhouse units to newer concepts, the managers said. Meanwhile, measures are being taken to improve sales at the core-brand restaurants. The fact that Outback's beef costs, which rose more than 10 per cent over the past two years, seem poised to fall over the next 18 months, is another plus. Furthermore, the managers say the stock "trades at a reasonable valuation, given its earnings growth potential, which does not fully reflect its leverage to lower beef costs." The shares closed yesterday at $44.94.
© 2007 The Globe and Mail. All rights reserved.
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