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Growing Growth

November 18, 2011

With the stock market seemingly mimicking any number of disaster movie scenarios, many investors can hardly be blamed for letting their emotions get the better of them. Calm, cool, detached rationality seems to have been left by the wayside as the Dow plummets hundreds of points one day, recovers the next, then dives yet again. Against this ostensibly permanent backdrop of economic gloom, portfolio manager Serena Perin Vinton is optimistic regarding large-cap U.S.growth prospects: 

“Large-cap companies are performing relatively well compared with the overall U.S. economy despite concerns about the European debt crisis, broader issues regarding fiscal tightening in Asia and China, and the possibility of slowing GDP and inflation for the U.S. These issues are fundamentally very different from the liquidity crisis of 2008 and our view is that a recession in the near term, while possible, is unlikely based on these conditions.”

Companies within the large-cap arena typically generate cash flow and earnings growth by expanding market share and introducing new or improved products to new markets. Many are experiencing comparatively impressive revenue growth amid an otherwise sour economy through conservative management, deleveraging debt, and building strong balance sheets. Additionally, where the U.S. economy relies primarily on domestic consumers, large-cap multinational companies have business drivers both at home and abroad, providing a measure of diversification.

According to Perin Vinton, there are large-cap U.S. companies that can do well in difficult economic conditions. Companies that are the established hallmarks within their respective industries and maintain their positions typically have the potential to deliver steady growth, even in highly volatile markets:  

“When you look at all the companies in the S&P 500, over 40 percent of them have recently had dividend yields greater than 10-year Treasuries[1]. Free cash flow yields are significantly higher than that, so we feel very good about long-term sustainable growth prospects. We’re not talking about just over the next business cycle, but for multiple business cycles. Strong balance sheets reflect potential to grow into a sustainable expansion which could help power the stock market forward, particularly as it relates to growth stocks, and we see numerous positive aspects in regard to U.S. large-cap growth businesses.”

Until next time, Beyond Bulls & Bears leaves you with another pearl from the late Sir John Templeton:

“Search for bargains. You should try to buy that particular investment whose market price is lowest in relation to your estimate of its true value.”


[1] As of September 30, 2011, 49.8% of S&P 500 index constituents had yields greater than 10-year Treasuries.  Source: Standard & Poor’s and the U.S. Federal Reserve.

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