By Philip van Doorn, MarketWatch
UnitedHealth /zigman2/quotes/210453738/composite UNH +1.53% and Microsoft /zigman2/quotes/207732364/composite MSFT +2.15% are great examples of companies that have bought back a lot of stock and are outstanding corporate citizens. They have invested intelligently in their communities and have high rates of employee satisfaction.
In hindsight, when a stock is down, you find a company was buying shares at a high price and stopped at low prices.
Boeing /zigman2/quotes/208579720/composite BA +3.93% is another example that is considered a high-quality company that is a very consistent repuchaser of stock. [Boeing was the T. Rowe Price Blue Chip Growth Fund’s fourth-largest investment as of Dec. 31.]
We find companies all the time making more mistakes acquiring companies at high prices than reinvesting money or buying back stock.
MarketWatch: Have you done any repositioning over the past year in light of the return to volatility?
Puglia: Our overall turnover rate would indicate we didn’t do anything noteworthy or dramatic. Our turnover is in the low 30s, well below our pears. [A 33% turnover, for example, means a third of a portfolio would be changed in the course of a year.]
Today the U.S. economy seems to be doing rather well, but global economies have slowed and run the risk of further slowing. We have had to be mindful of that. We have kept close track of interest rates.
Financials have been one of the most challenging areas. There is not much of a financial weighting in the Russell 1000 Growth benchmark. That is challenging for us because we have an overweight position in financials. We still see significant value there.
There are a lot of cross-currents in this market. There are certainly a number of risks to growth. For large internet stocks, the level of regulatory risk has gone up and we have had to be mindful of that also. We have stuck with Facebook /zigman2/quotes/205064656/composite FB +2.94% and added to that and were heartened when earnings came through. Both the quality and quantity of user growth came through.
If you put risks in buckets, you have China, world economic growth and interest rates and then regulatory scrutiny. Those are pretty important risk areas we have monitored.
MarketWatch: What actions have you taken while assessing these risks and opportunities from recent volatility?
Puglia: We have been active buyers of things like Boeing, UnitedHealth, Facebook and even Alphabet /zigman2/quotes/205453964/composite GOOG +2.12% /zigman2/quotes/202490156/composite GOOGL +2.02% [Google’s holding company]. We’ve been a net buyer of technology — not so much in the semiconductor space, but more in software.
MarketWatch: What do you avoid?
Puglia: We have been pretty clear for the life of the fund that we are not especially interested in industries that are deeply cyclical or fragmented, where most participants don’t earn their cost of capital. We are very supportive of Michael Porter’s work on sustainable competitive advantages.
You look for industries and then companies with high barriers to entry. It is very difficult to manufacture aircraft, for example. Another example is cloud processing, including Amazon Web Services. We think there are high barriers to entering that business.
The companies have built so much scale, it will be very difficult for others to compete with Amazon Web Services or Microsoft’s Azure.
We look for companies with power in relations with suppliers or customers. I would argue a company like Amazon has developed a good amount of power with suppliers and customers.
MarketWatch: What about Apple — are you still holding the stock?
Puglia: Yes, but I am not as enthusiastic about it as I am about other names we have discussed. We had owned Apple in great size. At one time it was more than 10% of the fund, but we are not as enamored with it at this time.
After Steve Job died [in October 2011], we told clients that we would have to monitor the company very carefully because it was possible they would not innovate as well as they did in the past, particularly in the area of smartphones with big screens. Apple fell behind in innovation. That was when we sold a lot of our stock. We later became aware the smartphone market was maturing, especially in China, where it become clear consumers wouldn’t be wanting to pay $800 to $1,000 for a new smartphone. Competitors were providing good phones for $400 to $500.
MarketWatch: Are there any opportunities you believe the market is overlooking?
Puglia: We think people are still not paying enough attention to some of the durable growers. Growth has outperformed value, so there is a real tendency to think there has to be a reversion. There could be, but there are stocks that aren’t necessarily growth stocks — UnitedHealth and Microsoft or Honeywell /zigman2/quotes/205583690/composite HON +1.52% or Dollar General /zigman2/quotes/200691429/composite DG -1.05% or Boeing.
It can be the type of market where it is not a rising tide lifting all boats. Companies that are growing nicely can continue to perform reasonably well.
When we look at where there are really cheap stocks — energy is an area where we are tempted but we do not make a big commitment to energy.
MarketWatch: Any parting thoughts?
Puglia: People question active management, but so far it has worked out well for us.
Here are the 10 largest holdings of the T. Rowe Price Blue Chip Growth Fund as of Dec. 31:
|Company||Ticker||Share of portfolio|
|Amazon.com Inc.||/zigman2/quotes/210331248/composite AMZN||10.0%|
|Alphabet Inc. Class C||/zigman2/quotes/205453964/composite GOOG||6.1%|
|Microsoft Corp.||/zigman2/quotes/207732364/composite MSFT||5.8%|
|Boeing Company||/zigman2/quotes/208579720/composite BA||3.9%|
|Facebook Inc. Class A||/zigman2/quotes/205064656/composite FB||3.8%|
|Visa Inc. Class A||/zigman2/quotes/203660239/composite V||3.5%|
|UnitedHealth Group Inc.||/zigman2/quotes/210453738/composite UNH||3.2%|
|Booking Holdings Inc.||/zigman2/quotes/203576210/composite BKNG||3.0%|
|Alibaba Group Holding Ltd. ADR||/zigman2/quotes/201948298/composite BABA||2.9%|
|Mastercard Inc. Class A||/zigman2/quotes/207581792/composite MA||2.9%|
|Source: T. Rowe Price|
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