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There's upside potential in the pharmaceuticals sector, says Templeton Global Equity Group EVP Norm Boersma, whose Templeton Growth Fund is heavily invested there. He also believes there are opportunities in Europe, where some competitive companies are being punished because of the regional debt crisis.

Kate Stalter: I am very pleased today to be speaking with Norm Boersma. He’s the manager of the Templeton Growth Fund.

Norm, I want to just jump right in and ask the first question, in the context of what retail investors should be doing now. I noticed that regarding the sector breakdown of your fund, that pharmaceutical, energy, and telecommunications all have large representations. What is your take on that currently, with regards to individual investors?

Norm Boersma: Well, as everyone knows, it’s a pretty difficult time in the viewpoint of the markets.

The focus has been very much on the macro-level concerns, whether it’s Europe or recessionary fears in the developed world, and now even China’s on the radar screen. Stock valuations have plummeted because of that, and what we’re seeing around the world is really a series of valuations that you really haven’t seen for a while.

We’re back, in a lot of cases, to sort of early 2009 in terms of valuations. I think arguably the banking sector, the world economy as a whole, is in much better shape than it was at that point, so we think there are some pretty good opportunities in the equity markets.

Kate Stalter: What about some of the particular sectors where you are pretty heavily invested, such as pharmaceuticals or energy, for instance?

Norm Boersma: Yeah, they’re really very different things in terms of what’s driving them.

Pharmaceuticals tend to be a more stable sector. It’s one where people have been worried for, it seems like a decade now, about the growth prospects of the industry.

The ratings on the companies, if we go back ten years, they were probably trading at 30 times earnings. Today, most of them are trading at ten or less. They’ve started returning lots of cash to shareholders—the dividend yields are anywhere between 4% and 6% for the major pharmaceutical companies.

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The real worry out there is the near-term patent concerns. That’s been, for of a couple years, the focus of the markets, and it’s starting to happen now. And as we’re working our way through, a lot of those companies actually start to grow again on the other side of that.

So the market’s starting to recognize that, and the stocks are starting to act a little better. While we still like them, they not as cheap as they were at the very bottom.

Kate Stalter: How about the energy sector?

Norm Boersma: Well, the energy sector is getting beaten up a little bit by all the macro concerns. We had a fair bit in the oil-services area at one point, and pulled that back when oil prices were quite a bit higher. That sector’s really been under pressure as well as the integrated, so we’ve been kind of nibbling away a little bit at the sector as a whole.

It will bounce up and down with oil price of course, and there’s the risk that in the short term, the oil price weakens a little bit further even, but the valuations, we think, are attractive.

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Dividends, especially on the integrated side, are sitting in the 4% to 5% range. A pretty attractive income stream. We think longer term, oil prices stay high.

Kate Stalter: I was looking in the most recent prospectus, Norm, and I did notice that in pharmaceutical, a couple of the top holdings were Amgen (AMGN) and Pfizer (PFE). Anything you can say about either of those stocks right now?

Norm Boersma: Amgen we’ve owned for a while. They’ve got a new drug out on the market that we think adds an element of growth to the story again, and it got re-rated because basically their three major drugs were maturing. It’s a drug for osteoporosis, so it’s a new category, new drug, just starting to be introduced, so we think there’s some growth behind that.

Again, as with most of the major pharmaceutical companies, lots of cash-flow generation. Great balance sheet and they started paying a dividend, as well, so that’s sort of recognition that maybe they’re not as high a growth company as maybe historically, and the management is starting to realize that returning some of that cash to the shareholders is a good idea. Which usually is a pretty good catalyst for stock-price performance.

Kate Stalter: And how about Pfizer?

Norm Boersma: Pfizer is in a lot of ways a similar story. Great free-cash generation. Nice dividend yields. They have Lipitor going off patent this year, which is definitely a head wind. They have a number of new drugs coming on, so as they work their way through the Lipitor expiry, you basically start resuming growth again.

The stock is trading still below ten times earnings, and that is pretty cheap for any stock and especially for a stock with the sort of stability of a Pfizer. It’s trading at around eight times earnings right now. So still a pretty good deal.