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As Crisis Looms, Investor Buys Snacks, Kleenex, Band-Aids

It's commonplace to see stocks such as gadget giant Apple and chipmaker Qualcomm in so-called growth mutual funds. But Kleenex company Kimberly-Clark and Pampers purveyor Procter & Gamble ? Not so much.

Keith Goddard's Capital Advisors Growth Fund holds a mix of shares that tend to post fast earnings growth and stable companies with consistent revenue. The mutual fund manager is steeling himself for a possible collapse in stocks in Europe, which could take the U.S. stock market down with it.

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Wall Street sign

"We're a growth fund, but we have a much deeper focus on downside risk management than most," Goddard said. "The problem with growth funds as an asset class is that they typically capture 108 percent of the downside of the market and then they capture 108 percent of the upside. When you do the math on that, you aren't building wealth that way. You have to keep more of the gains, otherwise it doesn't work."

Goddard's growth fund focuses on any company with evidence of positive change, momentum and attractive values. His concentrated list of 30 to 40 holdings—which also include turbine and appliance maker General Electric and discount retailer Wal-Mart—has outperformed the S&P 500 over the past three and five years, though it trails over one year.

In explaining the diverse set of holdings in his fund, Goddard notes the difficulty of gauging other investors' reaction to the Eurozone sovereign debt crisis. EU leaders haven't agreed on a concrete plan of action that would prevent a debt crisis from spiraling out of control. As the manager of a mutual fund, Goddard said protecting clients is key.

"Greece is going to default, there's no debating that. But will it be orderly or disorderly?" Goddard asked. "Where do you want to be when you know you have this potential crisis out there? One thing you can do to defend yourself is to own stocks that are already there from a valuation perspective."

The Capital Advisors Growth Fund portfolio owns several traditional growth stocks, with Apple as the fund's second-largest equity position as of June 30 with a weighting of 4.5 percent. Internet search company Google is also among the fund's top holdings.

The fund's other positions, though, aren't typically classified as hot growth stocks. Companies like snacks producer PepsiCo , phone company AT&T , Band-Aid maker Johnson & Johnson and Wal-Mart all have weightings of 2.7 percent or more in the fund. Yet, Goddard is targeting returns on these stocks that would rival those of the most popular growth companies, which boast attractive valuations and yields.

"You need stability and you need lower volatility," Goddard said. "Dividends are a great way to do that. These stocks are dirt cheap relative to their own histories. It's a combination of risk management as well as valuation."

Goddard has put cash to work with some of the blue-chip stocks as he's regularly measuring the risk climate in the stock market. Goddard uses three metrics—valuation, trends and risk—to get an objective score. He prefers to use normalized 10-year average earnings to find stocks that trade at low valuations, with the expectation that the worst is already priced in.

"Estimates are frequently wrong and profit margins are such a key part of that equation and they are much more variable than people think," Goddard said. "We have been in the most expensive quartile of that range since the end of 2009, so the market has not been cheap for a long time even though everyone says the forward price-to-earnings ratios are so low."

Instead of looking at the S&P 500 against this year's or next year's estimates, as many investors do, Goddard said he's happy if he can find stocks that already trade at 12 or 13 times their 10-year average earnings. "That's where the stock market would likely bottom out as a whole in a bad scenario," he said.

Goddard offers up several stocks where he sees growth potential, which TheStreet outlines on the following pages.

Kimberly-Clark

Company Profile: Kimberly-Clark is the manufacturer of personal hygiene and consumer products, with a portfolio of brands that includes Huggies, Kleenex, Cottonelle and Kotex.

Share Price: $69.67 (Sept. 19)

Growth Potential: With the emergence of a global middle class, Kimberly-Clark's portfolio of hygiene products are the growth story for the company. "As living standards improve and people move into cities all over the planet, the market they sell to is growing," Goddard said. "There's a growth story at Kimberly-Clark. People would rather use regular diapers than cloth diapers."

Kimberly-Clark is a recent buy for Goddard's fund, as he was attracted to a stock that yields more than 4 percent and has lagged due to increased input costs and competitive pricing pressures. Goddard keys in on a near-term catalyst for Kimberly-Clark, which is news that fellow consumer products company Procter & Gamble is raising prices.

"That gives Kimberly-Clark an umbrella to raise prices and help offset some of those cost pressures," Goddard said. "Some of the commodities they rely on have rolled over and started declining, so they should get some relief there. The cost-cutting initiatives the company has put into place are the third leg of the stool, if you will."

Goddard said he expects that Kimberly-Clark is in a position to have positive earnings surprises, rather than negative earnings surprises. The company topped expectations in the second quarter after falling short of analysts' estimates in four of the previous seven quarters.

"You have a company with a near-term catalyst, plus it's a blue chip, plus it has a dividend yield," Goddar said. "It's worth hanging onto because of the dividend."

General Electric

Company Profile: As one of the most widely known brand names in the world,

General Electric

is an advanced technology, services and finance company. GE makes industrial goods from light bulbs to jet engines to kitchen appliances to diesel locomotives.

Share Price: $16.03 (Sept. 19)

Growth Potential: GE is the definition of "blue chip," but the company still has strong growth prospects in healthcare, fuel efficiency and technological development, all of which are encapsulated in the company's Ecomagination campaign. Goddard said that, cycle to cycle, GE "ought to be able to deliver very attractive returns on capital and grow the dividend on a regular basis."

Goddard is an owner of GE because of the combination of a high dividend (3.7 percent) and valuation; GE shares trade at 11 times the company's 10-year average earnings. However, Goddard is most impressed by GE's prospects now that its house is in order.

"They've got their mojo back," Goddard said. "GE Finance is under control now and it's a profitable unit, and I don't think they'll make that mistake again. The thing that is underappreciated about GE is that the company is like Berkshire Hathaway in that it has the ability to do extremely long-term projects with their capital. We're talking projects that take 10 to 20 years to pay off. GE is one of the few companies that make that a specialty. That was their edge, and they got away from that by allowing GE Finance to become too big a part of the company."

Transocean

Company Profile:

Transocean

is the world's largest offshore drilling contractor. However, Transocean became synonymous with the Deepwater Horizon explosion and subsequent oil spill in the Gulf of Mexico in April 2010.

Share Price: $57.94 (Sept. 19)

Growth Potential: Goddard has a fascinating way of thinking about his investment in Transocean. In each of the past six consecutive years, Transocean shares have hit $80. The stock has also traded above $70 a share in each of the past seven years. Both time periods include the Gulf oil disaster and a drop in oil prices.

"It's a $56 stock today. What are the odds that I pay $56 for the stock today, sometime in the next two years I'll have a chance to sell it at $70 or $80 if I want to?' Goddard said. "Odds are you will have that opportunity. In the meantime, you collect a 5.5% dividend yield."

In addition to the dividend yield and the historical trade data, Goddard is a fan of Transocean as the stock trades at only 11 times its average earnings over the past 10 years. "It's already priced where we would worry the overall market might go in a worst-case scenario," he said.

The dividend is relatively new, so people don't trust it to be sustained, Goddard said. And he also points out that the company is still tainted from the Gulf explosion.

"But even in the heat of that crisis, when we didn't even know the well would be capped, the low was $42. I can live with $56 to $42 as long as I'm getting my dividend," Goddard said. "And they recently pledged to pay $1 billion per year in dividends, which is about $3.12 per share."

Ford and General Motors

Company Profile: Ford and General Motors are the two largest automakers in the U.S.

Share Price: Ford at $10.43 and GM at $22.92 (Sept. 19)

Growth Potential: Goddard offers a perspective on the seasonally adjusted annual rate of auto sales to explain how Ford and GM can be considered growth companies.

"When you think about the annualized run rate of auto sales in the U.S. market, 10 million is like a depression number," Goddard said. "We had averaged 16 million to 17 million consistently for a long time. In 2008 and 2009, we got to the unthinkable 10 million run rate."

Goddard says that both GM and Ford showed that they can break even at such a low level of auto sales in the U.S. market. With an annual run rate now closer to 12.5 million, which is typical for a normal recession, Goddard said the stocks are undervalued.

"Even at this level, GM and Ford are set to earn very attractive profits this year after earning very attractive profits last year," he says. "What are they going to earn when we get to the 16 million or 17 million run rate? These companies are going to make a lot more than the stock prices are implying, whenever we get back to a more normal run rate of auto sales. This economy needs more cars and they will eventually be sold."

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