Apple, Michael Kors, Visa, eBay: Larry Puglia's Bets

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IBD Special Report: Mutual Fund Monthly

The $15 billion T. Rowe Price Blue Chip Growth Fund is in the top tier of large-cap growth portfolios over several recent time periods.

Portfolio manager Larry Puglia has done that with a focus on stocks capable of sustainable growth.

Many of the fund's large-cap durable growers also happen to pay dividends that increase each year.

The fund was up 17.80% this year going into Tuesday. That put it into the top 14% of its peer group, which averaged a 14.17% gain, according to Morningstar Inc. The S&P 500 was up 14.41%.

Over the past three years the fund's average annual gain is 12.76% vs. 9.90% for its direct rivals and 10.92% for the big-cap bogey.

Puglia, who is 52 years old, talked with IBD from his office in Baltimore.

IBD: You seek companies that can sustain high growth for three to five years. What sort of companies do that?

Puglia: Companies need several things. We use (Harvard Business School professor) Michael Porter's analysis that it takes companies with competitive advantages. Warren Buffett talks about franchise companies. And Morningstar talks about moats. We want to see stable to improving margins. We want to see companies taking market share. We ask if the total addressable market for a company's products is growing quite large over time.

The final piece is management. All of the other things are not that important if management does not know how to reinvest free cash flow.

The analogy is that a company that generates superior return and has strong free cash flow but does not have strong management is like a fast ship without a rudder. Sooner or later, it will run aground.

IBD: How many of your holdings pay a dividend?

Puglia: Eighty-eight out of 132. Exactly two-thirds.

IBD: Have you tried to tweak your portfolio this year to cope with volatility?

Puglia: If you could anticipate market changes so you could transition from more growth to more defensive names -- but that's impossible to do. And we don't want to. That's why we look for durable growth.

IBD: Does that mean there's nothing you can do to position the fund for next year, when we don't know yet what the tax background will be?

Puglia: The longer it takes (for the political parties) to come to an agreement and the less confident investors are that agreement on the budget at least partially addresses entitlement reform, then the more concerned investors will be about riskiness of investing in growth.

Obviously, the more significant the tax increases -- and everyone knows there will be tax increases -- the more that investors will be concerned about growth. If the tax increases are well above what was discussed in the debt-ceiling negotiations (in the summer of 2011), that could damage growth.

IBD: So the longer it takes Washington to reach an agreement and the higher the taxes, what will you do with your portfolio?

Puglia: The longer it takes or the higher the taxes, the more that's going to lead you away from companies that are economically sensitive. And the more that will cause us to want companies that would do fairly well even in a lackluster growth environment. We will emphasize to even a greater extent companies that have durable, sustainable growth.

Will we continue to own companies in the technology area? Sure. But if the prospects for slower growth or even a double-dip recession increase, we will be even more reluctant to own industrial or more cyclical companies.

IBD: I imagine thatSherwin-Williams ( SHW ) is one of your dividend names. They recently bought Mexico's Comex. What else do you like?

Puglia: They've increased dividends 34 or 35 years. And it is important that we're having a housing recovery. New buyers paint their homes. People paint when they remodel homes.

I just hope the housing recovery is not dampened by the budget negotiations.

Also, Sherwin-Williams has increased their prices several times, showing pricing power. And a lot of raw materials have dropped in price. Oil is down. Titanium oxide is moderating. Still, someone downgraded it. That's why it dropped recently. It's still attractive. It's done well, though, so we're not buying aggressively at current prices.

They have a chance to earn $10 a share in 2014, so they're trading around 15 times 2014 earnings, which is reasonable. We would consider buying on any correction.

IBD: Why reference 2014 earnings rather than 2013's?

Puglia: We are less than a month away from 2013. And we generally price stocks using earnings estimates for the next calendar year. Consequently, we are starting to price stocks using calendar 2014 estimates.

IBD: Is Apple ( AAPL ) a dividend stock for you?

Puglia: They recently started one and they have the ability to pay a growing dividend. We think it's unwise to eliminate a company like that from a potential buying pool.

IBD: Is Apple's recent pullback a long-term concern for you?

Puglia: It is under pressure. Some concerns are real. The iPad's 55% market share is not sustainable. And they've had supply constraints with the iPad mini and iPhone 5. Supply is catching up, though. Still, there's more competition coming. Samsung is a good company, and its products (like the Galaxy smartphone) are selling well.

(Amazon's) Kindle, which is not directly comparable to Apple's tablet, is selling briskly.

And while the iPad is on a closed system, Android is more of an open system. That means that if customers see Android products and features as equivalent to the iPad, they may be less willing to pay a premium for the iPad.

And demand for Mac computers is not so strong. But no one's desktops and computers are selling as well as handhelds.

But Apple's positives are there. They feel good about demand for the holidays. They have a share buyback in place. They've instituted dividends. We think the stock is mispriced. They'll have over $200 a share in cash on their balance sheet in the next 18 to 24 months, closer to $250 really. They'll earn $50 a share in 2013 and $60.70 in calendar 2014. That means the stock is trading at less than 10 times 2014 earnings before you consider the cash. Once you take the cash out, it's more like seven times earnings. That's cheap in our view.

IBD: Do dividends help the fund weather volatile markets?

Puglia: Dividend growth helps some stocks perform better in volatile markets. But dividend growth is essentially a byproduct of durable growth, which we pursue. There are durable earnings growers that do not have significant dividend yield, which we think should also perform well in volatile markets.

IBD: Michael Kors ( KORS ) is one of your nondividend plays.

Puglia: It is.

IBD: Is its recent pullback a long-term concern for you?

Puglia: We're always concerned about companies that have fashion risk. They have more fashion risk than we would typically find in the sector. But they're becoming a more accepted brand name across a variety of products -- wrist watches, handbags. They're competing withCoach ( COH ), which we still own and has less fashion risk.

The overarching point about Kors is that they are becoming a sought-after brand, and will have longevity. They have a variety of products, garments, handbags. Growth will be stronger than people realize and more durable.

IBD: Visa ( V ) just keeps trending higher. Can it keep it up?

Puglia: We have meaningful positions in Visa andMasterCard (MA). Some new technologies threaten them. Others could augment their growth.

MasterCard has partnered with some companies working in the area of near-field communications and outfitting phones with gear to enable swipes and make payments. They have a partnership with Google Wallet. Visa has introduced "V.me" mobile wallet.

EBay (EBAY) just reported Black Friday results. PayPal (eBay's online payment system) numbers are up close to 200%. So electronic wallets, new payment technologies are enjoying robust growth. And the bread-and-butter credit card payment business continues to show steady growth.

Visa does not own a European operation. So because that market is weaker, it has been better for Visa.

IBD: Speaking of eBay, how is its Marketplaces (e-commerce) unit doing?

Puglia: Both PayPal and Marketplaces are doing well. PayPal is growing more rapidly. But it was a lot more important for management to fix the (bigger) Marketplaces business. And they've done that. They fixed the website. They brought in third-party sales, similar to whatAmazon (AMZN) has done.

We think they could earn over $3 a share in calendar 2014. Maybe $3.25 to $3.40. So they're trading at just 15 times what they could earn in 2014.

IBD: What will it take forPriceline (PCLN) to recover from its exposure to Europe? Does Europe have to get better?

Puglia: To a degree. It's reassuring to us that after a quarter or two of earnings disappointments, they have shown improving growth. Business reaccelerated for Bookings.com, their European engine. Agoda, which is prevalent in Asia, continues to do well. Priceline was already reasonably priced when it stumbled, its stock corrected, and that made it even more reasonably priced.

IBD: Amgen (AMGN) is helped by sales of Enbrel. What else do you like?

Puglia: Amgen is a company that has struggled a little. Reimbursement (from Medicare, Medicaid and other sources) concerns surround a number of their products like Epogen, which is essentially a red blood cell stimulating factor. Then they have Neupogen, which stimulates white blood cells.

Both are big products. Another, Aranesp, has been hurt. It is used by kidney dialysis patients. There's been a big debate about how much of it should be consumed. That's resulted in a dramatic slowing of that product.

Other products, like Prolia, have all kinds of derivatives. Some are used to rebuild bone mass by women with osteoporosis. Others can control lesions that prostate cancer patients might suffer. Prolia has shown dramatic growth.

In their pipeline are a series of compounds that lower bad cholesterol or high-density lipid cholesterol.

Amgen is not our favorite biotech. But the company has cut expenses. It is probably going to grow its dividend. And its valuation is still interesting.

IBD: PVH (PVH) gapped up Oct. 31 after news of the Warnaco acquisition.

Puglia: Right. That buy was postulated for some time. PVH owns (the Calvin Klein brand) and Warnaco licenses (Calvin Klein underwear) from PVH. The deal lets PVH unify the brand. And it gives them control over valuable licenses in Europe and various markets. And it will let them save a lot of expenses by taking out redundant functions.

PVH has other brands like Tommy Hilfiger (and Van Heusen, Izod and Speedo).

IBD: American Tower (AMT) benefits from carriers upgrading their networks to 4G. What are the risks?

Puglia: Technological threats. There are some approaches to wireless data and voice that don't require big towers. Some only require small transponders. We've been watching that trend for three to four years. We're comfortable nothing will happen soon, but it's out there.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

Referenced Stocks: AAPL , COH , KORS , SHW , V

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