Beyond Bulls & Bears

Growing Growth

Wouldn’t it be great if there was some sort of traffic light to let you know when it’s safe to get into or out of the stock market? You know: green for go and red for stop. A lot of investors might think so, especially these days. Emotions are running at a fever pitch, triggered by skyrocketing triple digit market ascents one day and staggering plunges the next. In a volatile environment like this, it can be hard to remember that the key to investing is in disciplined methodology, not market timing. 

Serena Perin Vinton, portfolio manager of Franklin Growth Fund, is finding good reason to be optimistic when it comes to large-cap U.S. companies, even in the face of ongoing European sovereign debt aftershocks shaking the global economy, and persistent whispers of the U.S. potentially dipping into another recession:

“Large caps have been holding up relatively well against concerns around Europe and some of the broader issues regarding fiscal tightening in Asia and China and the potential for slowing GDP and inflation in the U.S.  Amid these challenges, we see this as a very different economic environment from that of the 2008 liquidity crisis, so we believe the likelihood of another recession in the near term is fairly remote. Our focus continues to be on investing in established leaders, and we’re discovering numerous high-quality, long-term growth businesses at attractive valuations.”

U.S. large-cap companies have been performing well compared with the overall U.S. economy for a variety of reasons. Many are multinationals, taking advantage of international growth by expanding into new markets and targeting new consumers.

Additionally, numerous companies within the large-cap universe have been effective at generating earnings and cash flow growth through market share gains and the introduction of improved and new products. Within an overall environment marked by strong balance sheets and conservative management, we believe large-cap growth stocks are proving relatively inexpensive considering the amount of long-term growth they can potentially generate:

“There are a number of positive aspects in regard to U.S. large-cap growth businesses. If you look at all the companies in the S&P 500, over 40 percent of them recently have had dividend yields greater than 10-year Treasuries[1]. Free cash flow yields are significantly higher than that, so we feel good about long-term growth prospects. We’re talking about sustainable growth businesses not just for one business cycle, but for multiple business cycles—Franklin Growth Fund’s 4 percent turnover equates to an over 20-year holding period[2]. Strong balance sheets reflect the potential to grow and achieve a sustainable expansion which could help power the stock market going forward, particularly as it relates to large-cap growth stocks.”

Until next time, Beyond Bulls & Bears leaves you with another pearl from the late Sir John Templeton:

“Search for bargains. You should try to buy that particular investment whose market price is lowest in relation to your estimate of its true value.”

What Are The Risks?

Historically, the fund has focused on larger companies. The fund may also invest in small, relatively new and/or unseasoned companies, which involves additional risks, as the price of these securities can be volatile, particularly over the short term. In addition, the fund may invest up to 40% of its net assets in stocks of foreign companies, which involve special risks, including currency fluctuations and economic as well as political uncertainty. These and other risks are described more fully in the fund’s prospectus.

[1] As of September 30, 2011, 49.8% of S&P 500 index constituents had yields greater than 10-year Treasuries.

[2] The percentage of the fund’s portfolio that changed over the preceding one year period as of the fund’s most recent fiscal year end.

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