Quick Take: The stock market’s recent rally is not an aberration, says Gary Craven, who has managed Evergreen Emerging Growth/A (EKAAX) since 1998.
It’s clear that the economy is steadying, and continued low interest rates and any tax cuts approved by Washington will give it added support, Craven argues. Also, more companies have been topping analysts’ earnings estimates than missing them of late, he says. These factors have led investors, who have shunned growth stocks the last few years, to look at them again, says Craven.
Evergreen Emerging Growth was up 12% this year through last month, versus gains of 4.1% for the average small-cap growth fund, and 4.8% for the Standard & Poor’s 500-stock index. For the three years ended in April, the Evergreen fund lost 17.2%, versus a loss of 17.3% for its peers, and 13% for the S&P 500.
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People have become more willing to consider growth stocks, high-yield bonds, and other relatively racy investments of late, says Gary Craven.
That can be advantageous to a money manager like Craven, who trolls for companies with expanding top and bottom lines in overseeing the $525-million Evergreen Emerging Growth Fund.
“We think the rally we’ve seen in growth is well founded,” Craven said from his office in Boston. “There’s a lot of money that could still shift” into that part of the stock market, he added.
Now that the uncertainties raised by the war in Iraq have been erased and the economy seems to be firming up, investors have been seeking higher octane returns than they can get in money-market accounts or value-oriented mutual funds, he said.
Craven instead focuses on companies he thinks can increase profits at double the rate of the gross domestic product, a gauge of the economy’s health. He also likes above-average returns on invested capital, and strong competitive positions.
When he spots a stock he wants, Craven tries to buy it at a discount to what he thinks a business is really worth. The portfolio of the Emerging Growth fund sported a price-to-earnings ratio of 23.69 at the end of last month, compared to 33.23 for the Standard & Poor’s 500 index.
Craven hunts for stocks among mid-sized companies, which he defines as those with market caps of $1 to $9 billion. He prizes these, he explained, because they can fatten earnings and revenues as quickly as small companies, while offering the stability and staying power of big ones.