There are two keys to Frank Caruso's investment strategy.
First, the lead manager of $2 billion AllianceBernstein Large
Cap Growth directs his team to seek what he calls dynamic
Those gaps are big differences between how fast Caruso's team
expects a stock's earnings to grow and Wall Street's consensus
The second key is where Caruso has his team look for that gap:
four to five years out.
Caruso is adamant about avoiding a focus on the near term.
This approach had the fund up 32.46% this year through Nov.
30. That topped 78% of its large-cap growth peers, which averaged
29.96%. The S&P 500 was up 29.12%.
Over the past three years the fund's average annual gain is
18.14% vs. 15.70% for its peer group and 17.73% for the big-cap
Caruso, age 57, discussed his investment process with IBD from
his office in Manhattan.
How does your search for leading stocks differ from other growth
We think of equities generally (in terms of) a combination of
growth and capital returns in the form of dividends and share
buybacks, which support the valuations of equities over a long
And we take a long-duration approach to investment
opportunities. But most growth investors are dangerously focused
on the moment, growth in the short term. We try to exploit this
phenomenon where not a lot of analytical work is being done four
to five years out.
Give me some examples that show how your tack works, please.
In the spring of 2012,Chipotle Mexican Grill (
) missed a couple of months of sales estimates and the stock was
crushed. It went from about 440 to 230 a share. But our research
let us be marginal buyers in that lurch. We were confident in the
caliber of management. We bought a distressed stock in a great
long-term franchise (between May and July 2012 between 380 and
400). Later, they began to execute and sales improved. (We added
to our position) through the beginning of October 2012 at prices
between 284 and 330.
IsCognizant Technology Solutions (
) another example? You added a big chunk to your stake a few
They have a great core competency in technologies that are
increasingly desired by clients: in the cloud and in mobility.
It's been growing in the high teens and low 20s for years. It has
no debt, and it has excess cash.
After putting up a strong quarter, they got caught up in the
immigration debate. They rely on a lot of foreign visas to
conduct their business. The stock went down about 25% in a
That was an opportunity for us to reload. In the spring of
2012 we started initiating. The stock broke down into the high
50s (from 78). We met with Cognizant managers for three or four
hours, and we left convinced they still had a great business and
plan. The stock moved higher. The immigration debate percolated,
and we bought in the 60s. Now it's in the 90s.
Are you looking for investment opportunities created by the
prospect of the Federal Reserve tapering its bond buys?
We don't try to overthink the macro environment. So our marching
orders to our analysts are to focus on company fundamentals.
But when (Fed Chairman Ben) Bernanke started the tapering
discussion, after having underperformed the broad market and
value in particular the prior 12 to 15 months, growth securities
started to do well. So the market response to tapering seems to
have catalyzed a shift on the margin to growth stocks.
Is that because growth stocks tend to have more foreign
Yes, growth stocks generally have a little more exposure to
foreign earnings growth. And U.S. value stocks have more exposure
to, let's say, earnings that are fueled by Federal Reserve
stimulus steps. This is speculation on my part, but the
discussion regarding tapering might auger well for future growth
Computer services, software and systems are your largest category
of holdings at 12.36% of assets. Why do you expect good things
Cognizant is one, with close to a 4% weighting. The portfolio is
built around companies like that andGoogle (
). We think ofPriceline (
) as a service company. Some people think of it as a technology
) is an engineering simulation software company. People think of
this as a company that benefits from innovation.
In the old days, you had a team of engineers design a new
product, build mockups, then software would run calculations that
tested stress characteristics. It was on the tail end of the
innovation. And it might take weeks to run those simulations.
Today you can run millions of simulations before you even get
to the real engineering side of things.
Biotech is your second-largest industry group, with 5.45% of
assets. Why are you focused there?
Biotech came out of a very long, severe stock price
underperformance. Now we're seeing far greater pipeline
productivity emerging from a couple of leaders. We've centered
our investments onCelgene (CELG),Biogen (BIIB) andGilead (GILD).
Each is in a different area of disease management.
Biogen has been mostly a multiple sclerosis story. They've
come to market with a new oral medicine called Tecfidera, which
has experienced one of the most unbelievably successful product
launches in pharmacology history. But (investors) have been so
focused on MS that they haven't paid attention to some of the
products that are in development.
There is a hemophilia product (Eloctate) that we expect to
launch in mid-next year. It has the opportunity to take share
fromBaxter (BAX) and drive growth. And there's upside left for
Tecfidera for a long time to come.
Gilead is basically an HIV and hepatitis C story. It has new
product launches on the horizon. We expect Gilead to remain
dominant in HIV in the near- to midterm. Their hepatitis C
portfolio is starting to contribute meaningfully to corporate
Celgene is a multiple myeloma story, a cancer story. We see
expanding use of the marketplace.
All of these companies were coming off of pretty conservative
valuations for the kind of growth we envision them experiencing
for the next couple of years.
Why did you trim yourFacebook (FB) stake recently? You could not
have foreseen the pullback that began in mid-October.
The stock had an amazing run after reporting Q2 earnings. They
demonstrated great acceleration in their mobility business, which
people got excited about. The stock doubled in a short time.
We made a meaningful reduction in exposure in that euphoria.
It had become close to 3% of the portfolio. So we cut our
position roughly in half. It is roughly 1.5% today.
Their 20% fall? The stock had gone up the day they reported
earnings. Then management talked about the need to spend more on
investing in people and their product. A lot of highly valued,
high-growth companies have seen similar price corrections.
I'm comfortable owning the stock. At the right price, we're
getting back in.
Michael Kors (KORS) is relatively new for you. Are you concerned
that earnings-per-share growth has sharply decelerated in recent
We're always concerned about decelerating growth rates. But Kors'
decline is to a less-than-extraordinary level. That's still
better than a lot of companies. The stock is reasonably valued
for the kind of growth we envision. They have opportunities in
Europe and elsewhere overseas. Kors is seen as differentiated
here and overseas.
Any surprise toStarbucks' (SBUX) accelerating EPS growth?
Caruso: No. They're just an unbelievable company. They're one
of the few that has been able to consistently reinvent
themselves. They've done a brilliant job of expanding their
product offerings in small footprint stores, in being first to
market in using new technologies to connect to their customers
and their rewards programs are best in their class.
Precision Castparts (PCP) is up this year, but you've done some
trimming. What are your concerns?
They are persistent in acquiring businesses that let them
leverage their own infrastructure. And they're an important
supplier toBoeing (BA) on the 787. They generate about $10
million of content on every 787 that Boeing ships. Part of our
reduction is that we own both companies. If we sell, it probably
will be out of Boeing. Precision has lagged Boeing, so Precision
has more upside.
Intuitive Surgical (ISRG) is way down this year. Yet you've added
to your position in some recent quarters. Are you still
Caruso: This has been the most disappointing stock in the
portfolio in 2013. The interest we had was centered on the
uniqueness of their business. There are no competitors at their
scale. Robotic surgery is here to stay and will continue to
Procedure growth continues to expand at a midteen clip year
over year. The issue with execution relates to installation
sales, which has slowed, especially in the U.S.
We expect a couple more tough quarters. Procedure growth will
continue in the 16% area. There's no competition. Unbelievably
high margins, big share buyback, no debt. Hopefully, it will be a
contrary growth stock that recovers.
Are you concerned thatLinkedIn's (LNKD) EPS growth has slowed for
They've brought a new (advertising product for mobile devices) to
market. It will help their growth rate re-accelerate into next
year. Like we did with Facebook, we made decent sales in the
summer on the market euphoria around this stock. We're more
interested in finding a price to re-engage LinkedIn than
We think of it as a core holding, a business that's tough to
replicate due to their network effect and LinkedIn managers who
think of this as a business and want it to be profitable. It's a
good business that is richly valued. It will grow into that. So
getting the entry and trim points right is important.
Noble Energy's (NBL) EPS growth has soared the past two quarters.
But tumbling crude oil prices have doused energy producer stocks'
spark lately. This stock has pulled back about 10% since Oct. 30.
Why stick with it?
Noble is one of the best-positioned energy companies by way of
its fracking inventory. Overseas -- in Israel and Africa -- they
have unbelievable reserves. And they are really good operators,
really focused on creating value.
Energy firms are more volatile than what we typically engage,
but this company's assets are special.
We've seen a reduction in underlying commodity prices, so we
would welcome an opportunity to buy some of this back, make it
larger in the portfolio. It's not quite at a point where we would
start buying it back.
What's the biggest change you've made since taking this fund's
helm in February 2012?
Basically, our perception of growth is linked to a company's
ability to create long-term value. So our focus is further
forward than many other investors' focus is. It's more on the
economics of business and profitability than on the hunt for
earnings growth, which is sometimes very episodic. We're still
looking for opportunities in large-cap growth. But we're focused
on the longer term.
What was the fund's prior time horizon?
Caruso: I can't say, but it was probably more consistent with
most growth managers'. Annual turnover in growth portfolios is
often 100% to 150%. We're trying to do closer to 50%. We want
great franchises that have the ability to win over a very long
time. I tell my analysts I want them to understand how companies
are competitively differentiated. I don't want them spending
their time trying to anticipate when a bad business is a good