"Consumer Spending Will Remain Vibrant"
John Calamos has managed the $515 million Calamos Growth Fund (CVGRX ) since its inception in September 1990. Over that time, he has seen the market enjoy soaring highs and crushing lows. Through it all, he has focused on companies with sustainable earnings growth.
Although he can invest without regard to market cap size, his fund has a growing emphasis on mid-cap companies, where he is finding the best opportunities. The portfolio is down 9.3% year-to-date through August 21, after rising 26.6% in 2000 and 77.7% in 1999. The fund carries an S&P three-year overall rank of 5 stars, meaning it displays the highest combination of risk and return (unit of return per unit risk) versus its peers.
Calamos Growth has a significant focus on consumer staples and cyclicals, predicated on the belief that consumer spending will remain strong. The fund's portfolio typically keeps 65-80 names, with heavy diversification. Calamos drastically cut the fund's exposure to tech stocks last year.
Palash Ghosh of Standard & Poor's FundAdvisor recently spoke with Calamos about the fund's investing strategy, top holdings and recent portfolio moves. Edited excerpts of their conversation follow:
Q: What kind of stocks do you look for? What is your investment strategy? A:
Q: What kind of stocks do you look for? What is your investment strategy?
A:We use a combination of quantitative and qualitative methods to select stocks that we believe can provide above-average potential for earnings growth. We're basically looking for the top growers. We ask ourselves: can this company execute a plan to keep earnings growing? What is their access to capital? Are operating margins accelerating? Is top-line revenue growth accelerating?
We can invest in stocks of any market cap size and any industrial sector. However, we are currently finding the most promising growth stocks within the mid-cap sector.
Q: What is the average cap-size in the portfolio? A:
Q: What is the average cap-size in the portfolio?
A:The median cap size of the fund is currently about $1.5 billion, which gives us a solidly mid-cap complexion. As of June 30, small-cap stocks accounted for 36% of the fund's assets, mid-caps accounted for 46% of the fund, and large-caps represented about 19% of the portfolio. We generally hold between 65 to 80 names. We've always had a widely diversified portfolio.
Q: Is your investment process strictly bottom-up or are you willing to make sector bets? A:
Q: Is your investment process strictly bottom-up or are you willing to make sector bets?
A:We do look at macroeconomic factors and long-term demographic trends in order to identify some attractive segments of the market. For example, this year we are heavily invested in consumer staples and consumer cyclical stocks because we believe that the overall U.S. economy will have a soft landing. We believe we will not enter into a recession, that inflation will remain very low, and that consumer spending will remain vibrant as a result. We have no participation in the basic industries sector at all because of this trend.
Q: What are your largest sectors? A:
Q: What are your largest sectors?
A:As of June 30: consumer growth staples, 32.4%; technology, 18.3%; consumer cyclical, 12.9%; energy, 8.5%; financial, 6.6%; credit cyclicals, 6.6%; capital goods, 3.4%; consumer staples, 1.8%; and cash, 6.1%.
Q: Has your exposure to tech decreased since last year? A:
Q: Has your exposure to tech decreased since last year?
A:Yes. Our tech allocation was as high as 65% in early 2000. This was a result of both big bets we made in tech stocks as well as price appreciation. We initially bought tech stocks because they were, of course, the highest growers on a relative basis. Then, as a result of our investment strategy, we determined that the growth rate of most of these tech stocks were not sustainable and we pulled the plug on them. Our tech exposure was gradually reduced to about 10% by the end of 2000. We replaced these tech stocks with consumer cyclical companies.
Q: What kind of tech stocks did you unload last year? A:
Q: What kind of tech stocks did you unload last year?
A:They were mostly mid-cap tech stocks like Exodus Communications (EXDS ) and Qualcomm Inc. (QCOM ). We never had any Internet stocks because they never delivered any earnings of any kind.
Q: What benchmark index do you use, given your fund's all-cap nature? A:
Q: What benchmark index do you use, given your fund's all-cap nature?
A:We have two: we use the S&P 500 Index, because it is such a well-known benchmark, but we also compare ourselves with the Russell 1000 Growth Index, which comprises the types of stocks in which we typically invest.
Q: The fund rose 26.6% in calendar 2000, while most major indices declined. What fueled the outperformance? A:
Q: The fund rose 26.6% in calendar 2000, while most major indices declined. What fueled the outperformance?
A:Moving out of tech stocks that did not have sustainable growth prospects and substituting them with consumer cyclical issues helped us quite a bit.
Q: The fund is down about 9.3% year-to-date this year, pretty much in line with the S&P 500. A:
Q: The fund is down about 9.3% year-to-date this year, pretty much in line with the S&P 500.
A:Yes. When the larger-cap market is in decline, as it has been this year, we tend to decline in proportion with the S&P 500. However, on the upside, we tend to significantly outperform the Index. For example, in 1999, which was a strong year for growth stocks, our fund rose 77.7%, while the S&P 500 gained just 21.0%.
Q: What are your largest holdings currently? A:
Q: What are your largest holdings currently?
A:Alliance Gaming (ALLY ), 2.7%; Doral Financial (DORL ), 2.2%; Fair Isaac & Co. (FIC ), 2.0%; Laboratory Corp. of America Holdings (LH ), 2.0%; H&R Block (HRB ), 1.9%; AdvancePCS (ADVP ), 1.9%; Washington Mutual (WM ), 1.9%; Henry Schein (HSIC ), 1.9%; Abercrombie & Fitch (ANF ), 1.9%; and Equitable Resources (EQT ), 1.8%.
Q: Can you discuss how a few of your favorite stocks illustrate your investment style? A:
Q: Can you discuss how a few of your favorite stocks illustrate your investment style?
A:H&R Block is, of course, the well-known tax-preparation company. It is a long-term holding for the fund and falls under the consumer spending theme we are playing this year. The stock has performed extraordinarily well this year. It has risen from about $20 at the beginning of the year to about $37 currently. H&R Block continues to show strong earnings growth, even amidst an economic slowdown. They are forecasting a 13%-18% gain in profits this year.
Advance PCS and Laboratory Corp. of America are both involved in medical testing and health improvement. These are also plays on consumer spending. Where are consumers putting their money? Well, many people are spending money on health care, and stocks like these are benefiting from this continuing trend. Advance PCS has seen its stock price almost quadruple since the beginning of the year, while Laboratory Corp.'s stock went from about $70 to a high of $90 before falling back a bit to $80.
Alliance Gaming manufactures the machines that are used in casinos and riverboat gambling facilities. Its stock has nearly quadrupled since the beginning of the year. Alliance is yet another consumer spending play. People are willing to spend their money in gambling parlors even during a weak economy.
Q: What are your sell criteria? A:
Q: What are your sell criteria?
A:We generally sell when a company's fundamentals deteriorate, when we identify a more promising opportunity, or when we determine that a company no longer has any additional upside on an earnings growth basis. Despite our high turnover, we have remained relatively tax-efficient.
Our turnover, which is about 150% annually, reflects the way we run the fund. We add to holdings a lot when we get more detailed positive information on their financials, and we also skim back or sell-out when we get bad news.
Q: Can you cite a stock you recently sold off and why? A:
Q: Can you cite a stock you recently sold off and why?
A:Last month we got rid of Boeing Co. (BA ), a large-cap holding, because we felt it could no longer deliver earnings growth acceleration. This was a cyclical play and we no longer no saw any upside on an earnings basis.
Q: Given the weakness of the U.S. economy and the global economic slowdown, do you expect the market to be equally weak for the remainder of the year? A:
Q: Given the weakness of the U.S. economy and the global economic slowdown, do you expect the market to be equally weak for the remainder of the year?
A:We are actually quite positive on the mid-cap growth sector looking out over the next 6 to 12 months. Although the market's performance doesn't show it, the economy is restructuring quite rapidly. Most of our job-creation comes from mid-cap companies. The question is: when will the economy turn around?
I think the large-caps could go sideways for several years. The valuations there are still quite high and they have to wait for their earnings to catch up to these lofty valuations.
From Standard & Poor's FundAdvisor
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