Considering economic uncertainty, it's best to stick with reliable blue-chip stocks, says Channing Smith, manager of the Capital Advisors Growth Fund . He favors companies including Pepsi and Procter & Gamble .
The mutual fund, which garners four of five stars from Morningstar , has returned over 14 percent in the past year, putting it in Morningstar's 94th percentile for large-capgrowth funds. During the past three years, the Capital Advisors Growth Fund has risen an average of 4.4 percent annually, better than 60 percent of all funds in this category.
Welcome to TheStreet's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.
Pepsi has been losing the cola wars as of late to Coke , so why do you like Pepsi better for your portfolio?
Smith: With Pepsi, you need to focus on the salty snack foods where the company dominates. We like the big multinational global blue chips like Pepsi in a slow-growth economy where they have a number of products that are expanding into the emerging markets like China and Russia. And we're seeing volume growth and organic growth in companies like Pepsi. It's also cheap and you get a nice dividend yield in the stock, as well.
Johnson & Johnson had some serious manufacturing problems over the past year. Have they turned to corner?
Smith: We think they have. They have solved a lot of the manufacturing issues, and part of the problem with Johnson & Johnson was the pipeline. And now what we are starting to see is
that their pipeline is really starting to come together. And we're going to see this pipeline really come out and produce very nice products over the next couple of years and be a driver in its growth. Also, the dividend yield is around 3.5 percent, which is well above the 10-year Treasury. And you can pick up the stock for around 12 times earnings, which is a discount to market. It's a great buy.
During this past earnings season, a lot of the consumer-goods makers have been complaining about higher input costs. Has Procter & Gamble been sufficiently able to pass these costs on to consumers?
Smith: It has. Historically, they are able to pass about 17 percent of those costs on, and the hope is that they can make up the difference in productivity gains. But this is going to be a headwind for a while. Procter & Gamble will be able to come out ahead on this eventually. But again, we want to focus on countries like China, Russia and Brazil. This is where Procter & Gamble has seen a lot of growth and is well-positioned to take advantage of this growth in the next decade.
Apple's stock is hitting new highs—it's at $397, up 21 percent this year. When do you get off-board from that company?
Smith: We think $500 is a reasonable price target. Apple is a stock that continues to do well. It's cheap. It's 10 times its cash. They sold 20 million iPhones last quarter and almost 10 million iPads. These are products people want. And yet you can pick up the stock at essentially a market multiple even though it's growing at multiples ahead of where the market is going. It's still a "buy," but it's just hard for people psychologically to say at $400 it's a "buy." But $500 to $600 is definitely not out of the question, especially with the Christmas season coming up.
Of all the drug manufacturers out there, why is your favorite Abbott Labs ?
Smith: We like Abbott Labs. One of the things we look at when we look at pharmaceuticals is the pipeline. That's why we like J&J. But Abbott Labs has a great pipeline coming up. They don't have the patent expirations that a lot of the other pharmaceutical companies have, and they have been posting 10 percent to 12 percent EPS growth consistently for the last couple of years. We also expect double-digit earnings growth over the next couple years. They have very consistent franchises. They have been doing a number of key acquisitions in countries like India and China, and are positioned well for future growth in the emerging markets, which we expect to see about one-third of revenue to come from in the next five years. It's also cheap. The dividend yield is about 4 percent, so it's just a great buy in a value market that not a lot of people realize.
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