Fund manager Noah Blackstein is bullish on the U.S. stock market despite the political wrangling south of the border, saying he has never seen U.S. companies looking as strong as they are now.
With Congress split on raising the debt ceiling so the federal government can pay its bills after next Tuesday's deadline, many investors have been running scared.
"The notion that the United States would default is highly improbable," Mr. Blackstein, who runs $2.5-billion in U.S. and global assets for Goodman & Co. Investment Counsel Ltd., said in an interview. "The United States will meet its obligations on its debt for sure."
"You need to distance yourself from the theatre of the absurd in Washington to the fundamentals of individual companies," said the manager, whose Dynamic Power American Growth Fund is up 51.5 per cent for the year ended June 30. Over a decade, it has gained 3.2 per cent a year, versus a 1.8-per-cent loss for the S&P 500 Total Return Index.
His Dynamic Global Growth Class fund is up 45.3 per cent for the year ended June 30. The fund has gained 6.9 per cent annually over 10 years, while the MSCI World Index has been flat in Canadian dollar terms.
Mr. Blackstein expects the U.S. market to remain choppy and end this year with a high single-digit or low-double digit return.
He doubts that the U.S. Federal Reserve Board will resort to a third round of bond purchasing, or quantitative easing, because he expects the economy to start turning around by the third or fourth quarter. As for the debt crisis, Washington has the flexibility to raise revenue and cut spending, Mr. Blackstein said.
"Their income taxes are the lowest since the 1950s. Their gasoline taxes are extremely low. There is no national sales tax, and it is the largest consumer economy in the world."
As congressional leaders wade in with rival plans to head off the crisis, "they are finally admitting they have a problem," unlike Europe, which regularly bails out deeply indebted peripheral countries, he said.
Many of his favourite U.S. companies get more than half their revenue from abroad, he points out. "I have never seen U.S. corporations so strong in terms of their balance sheets or their margins," said the growth manager, who runs concentrated portfolios of 20 to 25 stocks in his mutual funds.
Consumer discretionary stocks in the U.S. and European markets offer some opportunities to play the desire for luxury goods and other products in emerging markets, such as China and Brazil, he said.
Mr. Blackstein is a fan of U.S. consumer stocks such as Starbucks Corp., Under Armour Inc., and Wynn Resorts Ltd. While Wynn is a Las Vegas casino operator, the key to its growth is its expansion to the Chinese island of Macau, the gambling mecca of Asia, Mr. Blackstein said.
In Europe, he likes Burberry Group PLC, a British luxury fashion house that is aggressively tapping into the Chinese market.
Technology stocks also offer some of the best growth names, be it Baidu Inc., China's biggest search engine, or British chip designer ARM Holdings PLC, he said.
"But for a lot of the trends, whether it is the move towards cloud computing, mobility or the move to analyzing data, most of the businesses are U.S. companies."
He likes U.S technology stocks like Informatica Corp., VMware Inc., Qualcomm Inc. and Apple Inc. While it is rare for a company of Apple's size to post strong growth rates, he said that sales in China are expected to hit $9-billion (U.S.) a year as more Chinese snap up iPhones and iPads.
Mr. Blackstein "has a done a great job for unitholders," said fund analyst Dan Hallett of HighView Financial Group. He has outpaced the index, despite losing between 44 and 47 per cent in his funds during the market meltdown in 2008, and his high stock turnover can drive up costs for investors, he said.
While the Dynamic funds own stocks of giants like Apple and Google Inc., investors may not recognize many of the names in the portfolio because Mr. Blackstein looks for tomorrow's big companies, Mr. Hallett said.
"That takes a lot of confidence, especially when you combine that with concentration [in his stocks]"
Blackstein's Top Picks
The U.S.-based coffee chain is expanding globally and aims to triple its stores in China to 1,500 by 2015, Mr. Blackstein said. Still, the key to Starbuck's growth lies in consumer products and its foray into grocery stores where it has "virtually zero share" of the $50-billion (U.S.) market, he said. Starbucks could double revenues in its consumer goods segment with the addition of its VIA instant coffee and Starbucks K-Cup sales at margins that are nearly double the company average, he said.
The U.S.-based data-integration software maker, which helps companies store, move and access data from multiple sources, is a market leader, he said. There is huge growth potential from the "confluence of cloud computing, social computing [like blogs and instant messaging]and proliferation of mobile devices" that is leading to the creation of unprecedented data, and also a need by corporations to become efficient at amassing and storing information.
Alexion Pharmaceuticals Inc.
The U.S.-based biopharmaceutical company, which focuses on treating life-threatening diseases, has growth potential from its first drug Soliris, he said. The drug, which is used to treat a rare blood disorder, has been approved in the United States, Canada, the European Union, Australia and Japan. The company, which is seeking other uses for this drug and has other products in its pipeline, bought protein drug developer Taligen Therapeutics for $111-million this year to expand its portfolio.
- Shirley Won