July 16, 2003 — The market is only beginning to rally, says Doug Foreman, manager of TCW Galileo Aggressive Growth Equity Fund/I (TGMCX).
Looking ahead, Foreman thinks the tech and biotech sectors offer the most promise. “It’s just getting started,” the manager says of the potential gains from these industries. He bases his optimism on these sectors’ revenues and cash flows — “higher than in 1999″ — and valuations — “fractions of what they were in 1999.”
Being aggressive has recently fueled gains for the TCW Galileo portfolio. Faced with steep losses in the recent bear market, Foreman says many growth investors became more defensive. “I’m glad they got conservative,” he says of many peers. Foreman’s fund was the second best-performing mid-cap growth fund for the one-year period through June. Finishing behind Legg Mason Inv Tr: Opportunity Tr/Prim (LMOPX) with its 40% gain, TCW Galileo Aggressive Growth rose 23.4% for the one-year period through last month, while the average mid-cap growth fund was unchanged.
Though the fund outperforms in growth-led markets, it’s a lot more volatile than its peers, and has got hit hard on the downside. During the tech selloff in 2000, the portfolio lost 33% compared to a loss of 9.1% for its peers. The fund’s high standard deviation versus that of the average mid-cap growth fund highlights the variance of its returns, Standard & Poor’s data shows. Indeed, the fund had a rough time during the recent bear market. For the three-year period ended last month, TCW Galileo Aggressive Growth lost an average annualized 29.8%, versus 16.1% for its peers.
When picking stocks, earnings surprises are essential, Foreman says. Since stock prices are based on broad investment sentiment, Foreman feels the stocks most likely to outperform are those that post higher-than-expected earnings. “I strongly believe earnings surprises are the only thing that will determine if a stock is over or undervalued,” the manager says. Over the five-year period ended in June, the fund has in fact gained the edge, returning an average annualized 1.4%, versus a gain of 0.3% for its peers.
Though willing to step out from the crowd, Foreman, like others, looks for stocks through bottom-up fundamental analysis. His main investment criteria are good business models, unique products, and pricing power. Underlying these considerations, Foreman focuses on “the fundamental outlook of the business relative to Wall Street expectations.”
Going forward, Foreman expects the market will return to “more normal levels,” as capital and business spending start to pick up. He feels higher prices for goods and services in several industries, particularly semiconductors, signal a pending upturn. Despite this, Foreman says “people don’t have perspective — they’re all looking at what happened in the past.”
The market’s severe downturn in recent years has spurred opportunities, according to Foreman. In the technology sector, many survivors of the recent downturn look attractive, including Yahoo Inc. (YHOO), eBay Inc. (EBAY), and Amazon.com (AMZN). Foreman’s semiconductor picks include Maxim Integrated Prod (MXIM) and Xilinx Inc. (XLNX), and in biotech, he likes Genentech Inc. (DNA), another of the fund’s holdings.