What’s the best thing to talk about when the market is firing on all cylinders? Recessions, of...
Betting on a Recovering Economy
03/19/2013 9:45 am EST
Michael Sansoterra of RidgeWorth Investments Large Cap Growth Fund is putting his investors’ money to work in recovering sectors.
Nancy Zambell: My guest today is Michael Sansoterra, the managing director of Silvant Capital Management and also the portfolio manager of RidgeWorth Investments Large Cap Growth Fund (STCIX). Thanks for joining me, Michael.
Michael Sansoterra: Thank you.
Nancy Zambell: The economy has continued to improve steadily, and certainly the market has done great in the last few months. What is your take right now on the economy and the market?
Michael Sansoterra: The last time we chatted, we expected the market to do pretty much what it has done. Just slowly, but surely, recover from the depths of the recession, and that continues.
We had some jobless claims today that are still a little bit better than people had feared. So very slowly (improving), certainly slower than most people would like to see. We've seen people going back to work, and at the same time inflation is low, and the Fed has been very accommodative.
These are usually the scenarios where growth can return, albeit at a low rate. And certainly the sequester—the government spending cuts—are going to cause some headwinds, but we still think GDP will be a small positive number for the year. So no second recession, and we remain on that track.
It hasn't been particularly exciting. It has been frustrating for a lot of folks at times. But when you measure data and you look a little bit forward—if you really ask yourself what does production look like, what does employment look like, what's happening with pricing, what's happening with consumer spending—all of these data points—housing in particular has been a strong spot lately.
They are all slowly getting better, and they have been on that track for the last couple of years frankly. We remain on a healthy recovery course, and we think stocks in particular—large-cap growth stocks—can do well in that scenario.
Nancy Zambell: I would like to talk about the makeup of your portfolio. You seem to be underweight in energy and also in financials. A lot of people are saying that those are really great sectors to be in. You are also underweight in real estate. Can you address that for us?
Michael Sansoterra: It depends on which index you compare us to. If you measure us to the Russell 1000 Growth Index—not the S&P—we are actually overweight energy a little bit. We are a little bit under—call it a market weight—in financials.
With the exception of REITs, there is not a lot of real estate in the Russell 1000 Growth Index. The REIT portion is about 2% of the index. We don't typically own REITs, because they are not very growth-oriented. They don't really do what we do in as far as the companies we are looking for.
At Silvant Capital Management and in the RidgeWorth Large Cap Growth Fund, we are looking for companies that can exceed investor expectations. They are typically secular growth stories. They are doing something new, or something old in a new way. They are taking market share. They have pricing power.
REITs typically don't fall into those categories. We may decide to own one here and there on occasion, but we haven't for some time, and don't currently own any.
From an energy perspective, we have seen energy stocks do pretty well. They are very obviously economically sensitive. There has been a boom in the United States—particularly in the Northwest—where natural gas and oil are being drilled more than ever before, primarily due to fracking. We have seen a resurgence in United States oil production, which has allowed the RidgeWorth Large Cap Growth Fund to outperform in energy stocks.
Broadly speaking—from a sector perspective—we have a slight overweight in technology stocks, a slight overweight in consumer discretionary, and even health-care stocks are still slight overweight.
None of these are particularly large overweights. We don't really look at our performance from big sector allocations. We are stock selection, bottoms-up, fundamental stock pickers.
When we can find companies that can exceed investor expectations, who can take some market share, which can grow revenue and earnings faster than investors expect, we are going to look for them everywhere. And if we happen to find more of them in tech or discretionary or health care, then we will buy more of those companies.
As an example, we are finding more of them in those three sectors than we are in staples, or materials. So we are going to be company-specific. We are going to really look for the companies we think can outperform their peers and outperform the index. That always leads back to fundamental. And if we end up with a few extra in tech or in discretionary or health care, that is fine.
Nancy Zambell: Apple (AAPL) is still the biggest portion of your portfolio. Is that correct?
Michael Sansoterra: That's correct. On an absolute basis, it is the largest portion of the index.
Nancy Zambell: Apple has had its moments recently, with some people shorting the stock, some saying it has never been a better buy. What is your opinion on it right now?
Michael Sansoterra: We like Apple in the $430 range. We haven't bought any additional shares. Understand, we have been owners of Apple shares since 2007. We haven't purchased any new shares, so we have been trimming on risk control since the summer of 2009. We never bought any new shares of Apple in 2010, 2011, or 2012.
What that really suggests is that as the stock continued to outperform, not only technology broadly or technology hardware companies, computers and peripherals, but the market itself.
We were constantly trimming on strength. So when the relative underperformance began a few months back—call it six months ago—we had trimmed our position size notably.
That is just something we do from a risk-control perspective. So we still like the stock, but we are decidedly at an active share lower than we have ever been. It is about 5.25% of the Russell 1000 benchmark. We are at just slightly under 6.25%, just a little bit under 1% active above the index, which for us is relatively normal, to maybe even slightly smaller than the average overweight in the portfolio.
We typically have stocks that are 1% over the index weight, 1.25%. We have a handful of stocks that are closer to 2% over the index weight. So at 97 basis points or almost 1% over the index, it is a large absolute weight. But on a relative basis—compared to the index return—it is relatively normal to slightly below normal. That's kind of where we think it is.
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They have certainly grown in a hyper mode—given their size—for a number of years, and has been a fantastic performer. But as they become more challenged to really keep growing and innovating on a much larger base, it is just becoming harder to do.
We are pretty confident we are going to get a capital deployment from them at some point, in the form of a special dividend, increased dividends, or a stock buyback. It will likely be a combination of two of those pieces. When that happens, we think the stock can get nicely revalued, probably north of another $30 or $40.
We think we will probably see that in the next couple of months. But until that time, there is not a lot of reason to suggest that the key metrics—iPad units or iPhone units, or the cost of memory—would suggest that the company is going to exceed what is already priced into the stock.
They have been executing pretty well, all things considered, and they definitely have been growing, but expectations have risen over the last couple of years. And now it has just become a lot harder for them to surprise anybody.
Without some real change of innovation, I think the company will probably do OK—maybe a little bit better than the market from these prices. But we have got better growth ideas that have larger active weights in the portfolio, places we think will do better in the short and intermediate term.
Nancy Zambell: I am glad you brought that up. Would you give us a couple of names where you see exponential growth?
Michael Sansoterra: Sure. We have recently purchased some of the homebuilders. We like D.R. Horton (DHI). They are nicely situated in a lot of states that are seeing a rebound in home demand.
One of the more difficult parts of the market during the recession was obviously home prices. Once we saw some stability in home prices, and then rents in 2010 really started to rise, people that were normally buyers but could no longer qualify for loans got pushed into the rental market.
Now we have seen some of the banks begin to ease lending, and that has dried up some of the current home inventory around the country, particularly in some of the areas where it was hardest hit. D.R. Horton has done a really good job of taking market share.
The backlog for companies like this has just begun to pick up—one of the key metrics we track. We have seen D.R. Horton begin to take some market share.
We also like Under Armour (UA), a consumer discretionary stock. This is the company that sells sportswear for athletes, and they have done a great job of expanding into footwear.
Footwear is a very nice business. When you wear athletic shoes, you wear them out, and there is a high replacement factor as they get worn. Their footwear business is growing north of 40% right now. That is causing both buy side and sell side analysts to scratch their heads and try to catch up with how to model their revenue and earnings growth rates. And we think they have been misunderstood.
We actually like a handful of stocks, but home building and consumer discretionary trends are some of the things we are seeing currently.
Nancy Zambell: It makes sense. As the earnings start rising and employment picks up, we will see more money going to those sectors.
Michael Sansoterra: Agreed.
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