FUND WATCH


Growth Ideas From a Value Investor

The manager of JohnsonFamily Large Cap Value is finding bargains among large, fast-growing companies. He discusses four.



If you have trouble distinguishing between growth and value in today's market, then you're in good company. Wendell Perkins, who has managed JohnsonFamily Large Cap Value (symbol JFLCX) since 1998, detects a blurring between the categories. "There's a flattening of valuations across the board," he says. Premium price-earnings ratios have vanished for many health-care, services and technology stocks; discounts have disappeared for utilities, industrial cyclicals and capital-goods companies. Perkins's solution: Buy attractively priced growth companies. Over the past five years, according to Morningstar, his fund gained an annualized 6%, nearly five points per year, on average, better than the return of the SP 500 index.

Here's how Perkins selects stocks. He runs the financial numbers through a series of tests to identify the cheapest stocks. Then he examines qualitative factors to pick the best bargains. He likes rock-solid balance sheets. To avoid value traps ("cheap" stocks that don't rise), he scrutinizes trends in cash-flow generation and profit margins. What he's looking for are companies with rising free cash flows (earnings plus depreciation and other noncash charges minus the capital expenditures needed to maintain a business) and healthy habits of raising dividends, buying back shares, or making intelligent acquisitions.

Four growth stocks that Perkins reckons are selling at value prices:

Johnson Johnson. Perkins finds it remarkable that this global health-care powerhouse (JNJ) is priced similarly to an electric utility whose expansion is essentially capped by local economic growth rates. The pharmaceutical, medical-equipment and consumer-products divisions of JJ are all healthy. The company has a sterling balance sheet, generates tremendous cash flow and should be able to achieve long-term earnings growth of 10% to 11% a year. At $60, JJ sells for 15 times estimated 2006 earnings and yields 2.5%.

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Check Point Software. Perkins thinks the stock of this formerly high-flying tech company (CHKP) is selling at a bargain price. A leader in firewalls and protection of virtual private networks, the Israeli software developer trades at 14 times '06 profit forecasts and only ten times cash flow; long-term earnings growth is estimated at 14%.

General Electric. "The market has lost all interest in GE." But not Perkins. He thinks it's odd that the gigantic conglomerate (GE), which sells for 16 times earnings and yields 3%, is cheaper than the stocks of most large industrial companies. Perkins is bearish on the U.S. dollar, which should enhance GE's overseas growth prospects, especially in emerging markets. GE expects earnings to jump 12% to 15% this year. Last year, it generated a staggering $38 billion in cash flow from operations. That kind of cash generation makes it easier for GE to keep boosting dividends and buying back its shares.

EchoStar Communications. The number-two player in the satellite-TV universe, EchoStar (DISH) sells for only seven times estimated 2006 operating cash flow. Perkins notes that EchoStar, which is experiencing revenue growth of 10% to 12% a year, holds $1.6 billion in cash and generates $700 million a year in free cash flow. Johnson suspects that the company will eventually be acquired.

--Andrew Tanzer




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