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
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
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
Puglia, who is 52 years old, talked with IBD from his office
You seek companies that can sustain high growth for three to five
years. What sort of companies do that?
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
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
How many of your holdings pay a dividend?
Eighty-eight out of 132. Exactly two-thirds.
Have you tried to tweak your portfolio this year to cope with
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
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
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
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
So the longer it takes Washington to reach an agreement and the
higher the taxes, what will you do with your portfolio?
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.
I imagine thatSherwin-Williams (
) is one of your dividend names. They recently bought Mexico's
Comex. What else do you like?
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
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.
Why reference 2014 earnings rather than 2013's?
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
Is Apple (
) a dividend stock for you?
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.
Is Apple's recent pullback a long-term concern for you?
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
(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.
Do dividends help the fund weather volatile markets?
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.
Michael Kors (
) is one of your nondividend plays.
Is its recent pullback a long-term concern for you?
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
), 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.
) just keeps trending higher. Can it keep it up?
We have meaningful positions in Visa andMasterCard (MA). Some new
technologies threaten them. Others could augment their
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.
Speaking of eBay, how is its Marketplaces (e-commerce) unit
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.
What will it take forPriceline (PCLN) to recover from its
exposure to Europe? Does Europe have to get better?
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
Amgen (AMGN) is helped by sales of Enbrel. What else do you
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.
PVH (PVH) gapped up Oct. 31 after news of the Warnaco
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
PVH has other brands like Tommy Hilfiger (and Van Heusen, Izod
American Tower (AMT) benefits from carriers upgrading their
networks to 4G. What are the risks?
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