The cabin saved me from the storm/But also when the rainbow came/The shades were drawn, the covers taut/I felt those opposites the same./Because I felt nothing at all/And never saw how close the wreck/And never cheered the winds first still/As I might have up on deck.
So begins Robert Smith's poem Up on Deck -- a metaphor, says the manager of T. Rowe Price Growth Stock (TRSAX ), for taking risks in the stock market. "Writing is very therapeutic," he says. "If I'm having three or four bad days in the market, the pain just leaves when I finish a poem."
Luckily for Smith's investors, there hasn't been too much pain -- relative to other large-cap growth funds, at least. The fund's five-year annualized return is barely positive, just 0.3% a year, but the category average is -6.6%.
Smith believes the fortunes for his sector are about to change, and he doesn't want to be hiding in his cabin when it happens. "A lot of really smart people work hard in this business and don't do well because they're afraid of taking any risks," he says. "They don't want to own troubled companies because they're afraid of looking foolish. And they don't want to own companies that have performed well because they're afraid of them falling." In short, they end with average stocks and so-so results.
In the present-day market, Smith believes, many blue chips are relatively cheap. So why settle for average companies? "Marquee corporations such as Wal-Mart Stores (WMT ), General Electric (GE ), and Microsoft (MSFT ) have had good earnings growth in recent years, yet their stocks have done nothing," he says. As a result of this inertia, Smith says this is a "great buying opportunity."
KNOW WHEN TO HANG ON
When Smith buys, he holds. The fund's turnover ratio is a low 35%, less than half his peers' 89% average. That means he typically owns a stock for three years. Smith scoffs at the rapid trading found at many growth-stock funds because he believes that "if you own a great company, you don't need to sell it." That said, he will sell or reduce the size of a holding if it becomes too expensive. When a company's forecasted price-earning ratio is more than double the stock's expected earnings growth rate, he pares back. So if the growth rate is 20%, he considers the stock expensive at a p-e of 40.
That's not much of an issue now. Given all the blue-chip bargains, he's expecting more rainbows than stormy weather ahead.
By Lewis Braham