Large Caps Coming Back Into Vogue

04/23/2013 7:45 am EST

Focus: STOCKS

Here are some great large-cap ideas-companies with increasing earnings, sales, and dividends-courtesy of Edward Painvin of the Chase Growth Fund.

Nancy Zambell: My guest today is Edward Painvin, the chief investment officer of the Chase Growth Fund (CHAFX). Edward, welcome, and thank you so much for joining me.

Edward Painvin: Thank you Nancy. It's good to be with you today.

Nancy Zambell: The market's kind of crazy these days. We've gone up to more than record levels and now we've had a little pullback. I was listening to CNBC a couple of minutes ago...Sue Herrera said everybody is panicking about the pullback now. But two weeks ago, they said we're due for a pullback!

What's your take on this? Are we going higher, or are we just going to sit around for a while; just continue being volatile?

Edward Painvin: I think it's important to put the recent volatility into perspective. The market-the S&P 500-is still up over 8% year-to-date. And even though this is a minor, 2% to 3% pullback off all-time highs, I don't think it's that big a deal.

What's happening right now is that there is a sort of a reset going on in corporate America as it relates to earnings. We just recently entered the quarterly earnings season, and by and large these companies are doing a very, very good job of executing and delivering on their expectations.

But there are some minor short-term blemishes-whether it's the impact on the consumer from the recent payroll tax hike or the stronger dollar, which is impacting a lot of multinationals in terms of the FX translation.

This is just a short-term readjustment of expectations. It probably hasn't completely played out yet. We're still at the beginning innings of earnings season, but I think as we enter May, we'll be setting up for a better run into the rest of the year.

Nancy Zambell: I agree with that. Even though we've hit close to 15,000 on the Dow, there are really a lot of stocks that haven't really participated. I still see a lot of bargains out there. I know that the small-caps and the mid-caps have done very, very well. Maybe it's time for large caps, which is your bailiwick.

Edward Painvin: That's correct. It is interesting you mention that. One thing we have noticed is the market is becoming more selective, meaning-as you said-as the Dow Jones Industrials approached 13,000, it was led by certain sectors that you would think would not lead the rally.

In the first quarter of this year, for example, it was led by sectors such as health care, utilities, and consumer staples. And typically, when you start seeing economic recovery or a more cyclical rally, it's usually led by industrials, technology, and materials.

That was not the case in Q1. In fact, the technology sector was only up 3% or 4%. It was a drastic underperformance, so we would like to see less defensive leadership as it relates to this rally in order to have it become more sustainable.

But, by and large, fewer and fewer names are participating in this rally. And I think that this readjustment period will occur over the next couple of months.

Nancy Zambell: Why don't you tell me a bit about your firm, what kind of sectors you're involved in? I know you buy mostly giant- and large-cap companies, so please talk a little bit about that.

Edward Painvin: The Chase Growth Fund is a large-cap growth fund that invests in companies with market capitalization of $5 billion and above-all the way up to the multinational, mega-cap names.

The process of how we go about constructing the large-cap growth portfolio is very unique. We're one of the few firms out there that marries both the fundamental analysis-analyzing profit and loss statements, revenues, market share shift, and operating margins-that's the fundamental side.

We also analyze the technical analysis side which is more looking at the actual price action, volume, pattern recognition, relative strength, and price momentum. We feel that over the long term, this is the better way of generating outperformance and keeping a strong positive profile-by blending those two disciplines together.

We've been around for quite some time, here in Virginia-over 50 years. Again, this has been a time-tested, proven process that we feel is the way to manage money.

Nancy Zambell: Right now you're sort of equally divided, but you have quite a few stocks in the industrial, health care, and technology sectors. Those are your largest sectors still, is that correct?

Edward Painvin: On an absolute basis, that is correct. We also benchmark relative to the Russell 1000 Growth index, which is our bogey. Relative to that, our sector overweights tend to be more toward health care and industrials, and underweight in technology.

Nancy Zambell: I notice that the dividend yield is small on the fund compared to some of the other large caps. So it doesn't seem to me that you're actively seeking companies that are paying big dividends.

Edward Painvin: Our mandate is typically total appreciation of the portfolio. And since we're identifying and building a portfolio around these high-quality growth companies, typically they're not in the mature phases of their cycle. They're more in their infancy, and they're using a lot of their cash flow generation for R&D, for promotional activities to drive market share, and to enter new market territories.

So typically, we don't see very hefty dividend yields on a lot of our holdings. That being said, I think one of the great indicators is increases in dividends over the years, and many, many of our names are doing a very good job of not only generating the cash flow, but also increasing their dividends over the course of the last several years.

Nancy Zambell: You have about 4% of your holdings in Union Pacific (UNP).

Edward Painvin: Union Pacific is one of our top 15 holdings. This is a company that reported recently, and again, had very, very good numbers. Everything from a pricing increase spread out over all the different segments-including automotive, which is a big segment for them-or intermodal...even chemicals had a very, very, healthy, robust growth rate.

This is a firm that has a great network where they continue to strive to increase their efficiencies-increasing as many carloads as possible per locomotive, or keeping the train speeds up as high as possible-just to be more and more efficient. Their operating ratio-which is a key industry benchmark-set a record this quarter for the first quarter.

This is a name that we like very, very much. It's attractive on a valuation perspective, and the numbers continue to be revised up, which is another one of the tenet pillars of our process-making sure we have the earnings momentum behind every single one of our names. Union Pacific clearly stands out as it relates to that.

Nancy Zambell: What about United Rentals (URI)?

Edward Painvin: United Rentals is another name in the industrial space. This is an equipment rental provider, the largest in North America. They have about 800 different retail outlets and about 400,000 different items on their Web site-from forklifts to loaders to backhoes.

We're seeing a lot of the developments-whether it's residential or non-residential-where companies would rather rent particular equipment as opposed to buying it outright. They want to keep their cost model as variable as possible. And that really plays into United Rentals' model.

Their rental rates are increasing 4%, 5%, 6% consistently, and their utilization level is also improving. They just closed an acquisition with RSC last year that increased their fleet and their footprint. This is going to be a name that you know-trading at ten times earnings, where revisions to earnings are improving. It's a great name heading into 2014.

Nancy Zambell: The last one I wanted to ask you about was Target (TGT). Consumer confidence numbers have not been great, but they're very variable-one month they are more than expected, and the next month they're down in the dumps. But Target seems to be holding its own.

Edward Painvin: Yes. You know, when you're going to invest in the retail space, it's always nice to identify certain key drivers.

And with Target, the story over the last couple of years has been two-fold. One has been the PFresh initiative, which is really driving into the more consumable part of the market. And the Red Card program-more of a loyalty program-to drive traffic into their stores.

The real big driver for 2014 for Target is their expansion into Canada, where they've done a really good job of buying some properties at attractive levels and remodeling them. I think that's going to be an inflection point for earnings next year.

Granted, this year they've taken some hits in terms of dilution as they remodel these stores. But if we adopt a longer-term view, looking out over the next 12 to 18 months, this name should do just fine.

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