When Touchstone Funds in Cincinnati needed an investing whiz to turn around an underperforming mutual fund, it called stocks guru Louis Navellier, chief investment officer of Navellier Management in Reno, Nev. He accepted the offer. In early October, Navellier took the helm of the Touchstone Large Cap Growth Fund (TEQAX ) after merging its assets with the Navellier Millennium and Performance Large Cap Growth funds. So far, the change is for the better. The overhauled fund has generated total returns of 21.3% this year, outperforming its peers by 4.6 percentage points.
Even though the stock market has rallied hard -- some say too hard -- since the beginning of 2003, Navellier remains bullish. In fact, now's the time to "lock and load," he's telling clients. What to look for? Companies that can pull off earnings growth through revenue gains instead of cost-cutting, he says (see BW Online, 10/16/03, "Wanted: Food for the Bull").
Recently, Navellier discussed with BusinessWeek Online reporter Eric Wahlgren why he thinks it's the right time to buy stocks and what his top picks are. Edited excerpts of their conversation follow:
Q: You say investors should buy now because the market is trading at a reasonable price-earnings multiple. Yet the p-e of the Standard & Poor's 500-stock index is 19.2 times 2003 fiscal earnings -- above its historical average of 17. What's your rationale?
A:I look at the broad Russell 1000 [index of 1,000 largest U.S. companies] instead of the S&P 500. [Note: The Russell 1000 is trading at 13.5 times expected 2004 earnings, vs. the equivalent p-e multiple of 17 for the S&P 500.] The Russell 1000 is undervalued relative to bonds, and it's lower than the S&P 500. I think there's big potential for earnings surprises this quarter and beyond, so I see stocks going higher.
If you look at cash on the sidelines, it's at record levels. Cash is going to come back into the market. There are positive economic signs too. Retail sales were on fire in the second quarter. Business spending is picking up after a three-year drought. Economic [gross domestic product] growth was well over 5% in the third quarter and will continue to be strong.
The Bushies [in the White House] aren't stupid. They are going to do everything they can to make sure the economy is strong going into the November  election. I bet interest rates will not be raised until after the election. The service sector is creating jobs. The manufacturing sector is getting much healthier because of the weak dollar. There's still a problem with jobs in the Northeast, but if you're in the Midwest, people have jobs.
Q: What stocks do you like right now?
A:The medical industry makes up something like 13% of our economy. I like St. Jude Medical (STJ ). They make pacemakers. The medical equipment makers in general are doing well. Boston Scientific (BSX ) has the [drug-]coated stents. The number of [bypass procedures is] dropping because we can be stented. Medical equipment maker Stryker (SYK ) is another good one.
Generic pharmaceuticals are taking over. Teva Pharmaceutical (TEVA ) is my pick there. And the biotechs are looking really good right now. Gilead Sciences (GILD ) makes a new AIDS drug. Amgen (AMGN ) and Genzyme (GENZ ) are interesting now, too.
Q: And what are your picks in sectors outside of health care?
A:In tech, [computer maker] Dell (DELL ) is capturing market share. [Wireless-phone technology company] Qualcomm (QCOM ) is looking strong. Wireless company Nextel (NXTL ) has phenomenal cash flows. Nextel is definitely doing better than [phone-company] Verizon (VZ ).
Then there's [Internet media company] Yahoo! (YHOO ) and [Internet retailer] Amazon (AMZN ). Their third and fourth quarters are their strongest quarters. One thing that would help [them] would be one gigantic snowstorm to keep everyone at home.
In the automotive camp, we have Nissan (NSANY ), which is probably the most profitable automobile company in the world. They make the Titan truck (see BW, 10/10/03, "Nissan's Big, Brawny Pickup"). We really like them.
As far as retailers, I love Lowe's (LOW ). My second pick would be Bed Bath & Beyond (BBBY ).
Q: So how do you pick stocks?
A:Just so you know, we are entirely transparent. Our stock selection is now free. If you go to www.navellier.com, you can look at the thousands of stocks that we score.
For the fund, basically, we start with a 7,000-stock universe and get to a short list of 60 stocks or so by ranking them based on reward/risk ratio. At first, we are very focused on quantitative factors. Then we score stocks on sales, earnings stability, cash flow, and other key fundamentals, whittling it down further to about 30 or so stocks. Ultimately, we are looking for stocks that move independent of the market and have low deviation, or risk. It's a very cold-blooded approach.
Edited by Beth Belton