Canakaris Eyes Secular Growth Names

• Paul Katzeff
• On 6:15 pm EDT, Tuesday October 13, 2009

Count Ronald Canakaris among the optimists -- with an asterisk.

"I think we're in a cyclical bull market," said the manager of $2.5 billion Aston/Montag & Caldwell Growth Fund (NASDAQ:MCGFX - News). "But I do think we're overdue for a correction. The market is fair valued in the S&P 500. But plenty of stocks are attractively valued."

Canakaris is finding a lot of attractive values among high-quality secular growers. "They have lagged during the recovery as investors rotated into more cyclical issues," he said.

One reason Canakaris sees potential for a correction: "The market is overbought technically on a short-term basis," he said. "A lot of stocks are way above their 50-day and 200-day moving averages. They've done so well, they've overshot their trend lines."

Also, a lot of stocks he's tracking have hit their price targets.

"Basically, the market is getting ahead of fundamentals on an intermediate-term basis," he added.

Still, Canakaris is not too worried about any coming correction.

"A correction would be just that," he said. "Not the start of a bear market. Then the market will rebound and move higher."

Canakaris keeps a tight rein on his portfolio. He is holding 33 names. He typically owns 30 to 35.

He aims for companies with earnings growth of at least 10% a year.

And he tries to buy stocks when they are selling at 70% to 80% of what his team calculates is their fair market value. His team prices that value by projecting earnings growth over the next five to 10 years.

He tries to be disciplined about sells. Once a stock tops its fair value by 20%, it's on the cutting board.

This approach put the fund up 23.29% this year going into Tuesday. Its large-cap growth rivals tracked by Morningstar were up an average of 29.35%. The S&P 500 was up 21.50%.

Survival Of The Fittest

Over the past three years the fund has gained an average annual 1.48% vs. -3.44% for its peers and -5.50% for the S&P 500.

JPMorgan Chase was a top buy for Canakaris' fund in its latest disclosure period. The giant bank is up 46% this year.

Earnings have declined the past three years but analysts see EPS rising 23% this year and 80% next year.

"They were in a position because of their strong financials to capitalize on unsettled developments in financial markets," Canakaris said. "They were able to acquire Bear Stearns and Washington Mutual's banking operations."

Since then, JPMorgan has spun off Bear's merchant banking division.

"Not only are JPMorgan's earnings rebounding," he said. "But they have enhanced their normal earnings power with these acquisitions."

Coca Cola , a top holding in the latest disclosure, is up 21% this year.

Canakaris likes the soft drink colossus as a shock-absorber in a volatile market. "Not only are they up this year, but they are yielding in excess of 3%," he said.

He sees the yield as a bulwark against almost-zero yield in money market funds.

Return on equity rebounded to 34.9% last year after slipping in 2007. Earnings per share have accelerated for four quarters. They returned to positive growth in the past three quarters.

Another top holding, Apple , is up 124% this year. Return on equity has accelerated for two quarters.

"It's more fairly valued now," Canakaris said. "But it's one of the few tech companies that come out of the recession with higher market share and higher margins."

Also, cash will be close to $40 a share at year's end.

The fund also owns Cameron International , which is up 96% this year. The company makes oil and gas pressure control and separation equipment.

The firm provides deep-water drilling products and services. "That's where a lot of exploration is taking place," Canakaris said. "Earnings will be down, but are better than expected."

Buzz up!