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< back to Growth Equities page
Growth Equities
Investment Review and Market Outlook
2Q02
Resent Results
The market experienced extreme weakness in the second quarter and growth
oriented strategies were impacted the most, particularly high growth
strategies with an emphasis on Technology such as ours. The weakness has
been unprecedented for any recession/recovery period going back to 1912.
Economic growth slowed somewhat in the second quarter from the very
robust pace in the first quarter (a consensus +3.3% GDP growth versus
+6.1% for Q1), but this is not enough to explain the market’s behavior,
particularly since economic activity appears to have accelerated again
in June. What seems most apparent is that we are witnessing an event
driven market (terrorists’ threats, suicide bombers, and corporate
scandals upsetting investors’ confidence), as opposed to one which would
normally be correlating with fundamental factors such as accelerating
retail sales, strong order trends in manufacturing, and improving
earnings.
The Market Outlook
The evidence continues to show that the economy is recovering, and that
earnings on balance have bottomed and are growing. The market’s
disconnect can perhaps be rationalized, but the disconnect can not, we
believe, continue. Either the market is sensing problems that will soon
be revealed in the economic data, or the stock market will eventually
reflect the reality of improving activity.
With GDP growth slowing moderately in Q2, some have feared continued
declines or a “double-dip” in economic activity. However, recent
economic reports strongly suggest that we are on the verge of
accelerating going into Q3. Consumer spending slowed in May, but
chain-store sales rebounded sharply in June and recent surveys on auto
sales are looking up. With lower interest rates, mortgage refinancing
activity has soared again, which should help support consumer spending.
The continued strength in housing activity should lead to a lagged
increase in demand for home goods. Jobless claims were below 400,000 for
the fourth consecutive week, which means that corporations are adding
modestly to payrolls, which is a very important factor in sustaining
consumer spending increases.
On the manufacturing side, the purchasing managers indices, commodity
prices, and manufacturing employment trends are all pointing toward good
increases in manufacturing activity. Productivity gains have been
outstanding and are adding to increases in profits.
Stock valuations we believe are attractive at current levels,
particularly when PEs are adjusted for interest rates and inflation. The
S&P 500 Composite’s PE is only 80% of its 5 year median on forward 12
months EPS, and those earnings are still considered depressed.
The Positioning of the Portfolio
The portfolio is close to being equally weighted in the market’s four
predominate growth sectors—Health Care, Consumer Discretionary,
Financials, and Technology. We have a focus on superior, long-term
earnings growth, and in fact our focus on growth is higher than that of
our benchmark (the Russell 1000 Growth Index) and higher than that of
the average growth manager. This places us in a position to perform much
better than the averages when market conditions are favorable, but the
downside is that we are more volatile and more vulnerable to negative
sentiment because confidence in the future is a critical ingredient.
Earnings expectations for our companies reflect excellent gains for ’02
and ’03, both years up well in excess of +20%. Additionally, analysts
have on balance been revising earnings estimates upward for our companies
reflecting positive momentum in expectations. The most significant
exceptions have been a few of our tech holdings, where business spending
hasn’t materialized as quickly as previously expected but we feel still
remains a priority for IT managers.
Changes to the Portfolio
Most of the changes in the quarter were related to capturing those
situations where near term prospectives for earnings gains were the
clearest. As such we reduced our holdings in Technology by eliminating
Verisign and BEA Systems, and in Health Care we sold Human Genome
Sciences. We added to Genentech when test results on their new cancer
drug, Avastin, proved to be more promising than many had previously
expected. We added significantly to our retail holdings with the addition
of Dollar Tree Stores, a variety discounter growing rapidly in an
under-penetrated market. We also added to our cable/media positions,
Comcast and Rainbow Media, which fundamentally have been exceeding
expectations. We diversified our large position in Pfizer with the
addition of Forest Laboratories, a specialty pharmaceutical company
which has a large pipeline of new products in development.
back to top ^
About Us | Products | Personnel | Resources | Contact
The opinions expressed are those of Berkeley Capital Management and
based upon sources deemed reliable. BCM shall not be held liable for
inaccurate information obtained from these sources from which BCM could
normally, reasonably depend on as accurate. Past performance does not
guarantee future results.
FOR BROKER-DEALER USE ONLY. NOT FOR USE WITH CLIENTS.
A complete list and description of all the firm's composites and
individual securities' transactions and returns for the past twelve
months are available upon request.
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