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Targeting Real Growth in Large Caps
Oppenheimer Growth Fund
Interview with: Bruce Bartlett

Author: Dave Jennings
Last Update: , :
Bruce Bartlett looks for companies that are generating real growth by increasing sales and revenues, not just earnings from cost cutting methods. With the economy showing signs of sustained improvement, shareholders in the $1-billion Oppenheimer Growth Fund should benefit from Bartlett's expertise in targeting growth companies in the large cap arena.

Oppenheimer Growth Fund

A: The composite portfolio today, if we looked at it as if it were a single stock, has earnings growth of about 20% and we're paying about 20 times that. So it's about one times the growth rate for this year's earnings and itís actually at a discount if we look out to 2004. Which brings up an interesting phenomenon and that namely is for the first time since the late mid to late 1980s, we're starting to see growth stocks trade at a parity to their growth rates or in a lot of cases discounts to their growth rates. We didn't see that throughout the 1990s. Companies traded many multiples of their growth rates. It wasn't unusual for technology companies to trade six times their growth rates.

Q: Once the momentum slows, the momentum investors get out.

A: There are different types of momentum investors. There is price momentum and then there is operational momentum and they're very different. When we look at companies, we certainly would prefer that all of them could exhibit characteristics like that but we don't insist that they do. But what we do insist on is that they don't exhibit negative momentum, mainly if sales are slowing, margins are contracting and profitability is contracting, those are the companies we will disinvest in. We donít need to have operating momentum but we can't have negative momentum. Sales growth doesn't have to be accelerating but it canít be deteriorating.

Q: How often in market history does the growth rate equal one times the PE rates?

A: That's a very interesting topic, both from an academic perspective, but also from a real life perspective. When I went to school, in basic finance, they always taught us it doesn't make mathematical sense to buy a stock with a PE greater than 20. You wouldn't have been able to invest throughout a very lengthy period of our history. The reason why that turned out to be not a rule to follow is we've had decades such as the 1990s and parts of the 1980s where there was exceptional growth and valuations followed. The way we look at valuations when we look at companies is valuation is what we look at last. Actually, one of the differentiating factors about our entire process is we separate company analysis from stock analysis. Value managers can be attracted by exceptionally low prices, sometimes. And, managers of growth and value can often time shy away from companies that have apparently high valuations. In many cases, we find valuations exist for a good reason. In other words, some stocks are cheap because they deserve to be and some stocks are expensive because they deserve to be. If your true objective is to find great businesses, you want to separate the valuation of that business to avoid the types of natural biases that valuation can create. What we do is look for businesses that have the characteristics that we're looking for. And when we find one, we look at valuation from the perspective of if there is something prohibitive about the valuation that would prevent us from making a profit in it? Is it overly expensive? Is it extended in price at this point in time? Can the growth of the company and the ability of the company to maintain the growth justify the valuation? We ask all those questions separately. We've found that to be a much better discipline rather than having particular thresholds that we' won't exceed. You can get into market environments where valuations are impacted by interest rates. All those things can impact valuations, and those things can often times be separate from the operating characteristics of the company.

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