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Manager puts focus on blue-chip bargains

Larry Puglia likes valuations on S&P's biggest stocks


U.S. large-capitalization growth stocks have spent the past few years out in the wilderness, but fund manager Larry Puglia thinks that may be about to change as valuations on the largest stocks in the Standard & Poor's 500-stock index are especially attractive.

Mr. Puglia has been running the TD U.S. Blue Chip Equity Fund since inception in October, 1996. The $514-million fund is down 4.27 per cent so far in 2005. Like other U.S. equity funds, its results have been affected by the appreciating Canadian dollar. It had a return of 0.07 per cent in the 12 months ended Sept. 30 and 2.22 per cent a year on average over the past three years. It lost 9.93 per cent annualized over the five years.

The price/earnings ratio of the 25 largest firms in the S&P 500 when compared with the P/E of the index "shows that they are about as cheap as they have been going back to January, 1985," the vice-president of T. Rowe Price Group Inc. said. Large-cap growth has been basically out of favour in recent years; value stocks and small and mid-cap issues have been in.

Given the cheap valuations of large cap growth stocks, Mr. Puglia is upbeat about the prospects for large-cap growth stocks and thinks that as a group, they likely have about 25 to 30 per cent upside over the next few years. That would give them an annualized return of between 10 and 12 per cent over the next 24 to 36 months.

He expects the S&P 500 itself could show high single-digit annual returns over the same period.

He currently favours the financials, health care and technology sectors. Among his current holdings is General Electric Co. (GE-NYSE). The Fairfield, Conn.-based conglomerate has "a very good record of free cash-flow growth and dividend growth," he said. Also, management has been selling off some low-margin or lower-return businesses and has added new ones, including medical firm Amersham PLC, and media conglomerate Vivendi Universal SA.

Both are in industries that tend to produce higher returns, he said. Furthermore, Mr. Puglia said some operations such as jet engines and related services that had been under pressure have come back nicely. Putting it altogether, "we think GE is growing very nicely and trades at a very attractive valuation," he said. At yesterday's close of $33.58 (U.S.) on the New York Stock Exchange, GE shares are trading not far from their 52-week low of $32.67 set earlier this month.

Medtronic Inc. (MDT-NYSE) is a dominant company in the medical device field. Medtronic's core cardiovascular and spine businesses are doing "very well," Mr. Puglia said. Moreover, the Minneapolis-based firm has a number of emerging growth projects, including one for obesity treatment and several for diabetes, he noted. The latter includes work on an artificial pancreas. "Medtronic's stock has basically gone sideways for several years but the earnings have continued to march ahead," he said. Medtronic shares are currently changing hands at $56.88.

The picks in the financial sector include Franklin Resources Inc. (BEN-NYSE) and Legg Mason Inc. (LM-NYSE). Both are in the asset management field, which explains part of their attraction to Mr. Puglia.

San Mateo, Calif.-based Franklin has been very well managed, he said. Moreover, it has been "a great dividend grower over time and they are also returning a lot of capital to shareholders," he noted. He is also drawn to the stock by Franklin's fixed-income operations and its international business.

In June, Legg Mason, which has its headquarters in Baltimore, agreed to a deal whereby Citigroup Inc. would exchange most of its asset management business for Legg Mason's brokerage operations. Mr. Puglia said the deal will be "quite accretive" to Legg Mason's bottom line.

Thinking big

Larry Puglia, manager of the TD U.S. Blue Chip Equity Fund, says the price/earnings ratio of the 25 largest firms in the S&P 500 "shows that they are about as cheap as they have been going back to January, 1985."

TD U.S. Blue Chip Equity

MANAGERT. Rowe Price Group
TOTAL ASSETS$514.5-million

Returns to Sept. 30, 2005

1-month simple rate of return- 1.87%
3-month compound annual - 2.57
6-month compound annual1.79
1-year simple rate of return0.07
3-year compound annual 2.22
5-year compound annual- 9.93

Top 10 holdings

As of Sept. 30,2005

1UnitedHealth Group3.57%
3General Electric3.12
8American International Group1.89
10State Street1.67


© 2007 The Globe and Mail. All rights reserved.

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