Parnassus Aims For Growthy Bargains

• Paul Katzeff
• On 6:12 pm EDT, Monday October 19, 2009

Jerome Dodson loves a bargain. But he is not interested in mortally wounded stocks.

"In 99% of the cases, a stock is cheap for a reason," says Dodson, manager of $340 million Parnassus Fund (NASDAQ:PARNX - News). "Often it's because they are wounded. The question for me is -- can this turn around?"

If a company is shaping a new marketing plan to fix, let's say, wobbly sales, Dodson is interested. If a firm can get a grip on soaring costs for materials, it gets Dodson's attention.

"I want companies that are growing faster than the rest of the economy," he said. "But I want to buy them at attractive valuations, when they're out of favor with other investors," he said.

Dodson runs an all-cap-sizes strategy. And the fund is socially screened. He won't buy makers of alcohol, tobacco or arms. He avoids gambling stocks, nuclear utilities and environmentally flawed firms.

Sector plays illustrate his contrarian tack. By his shop's definitions, he had 20% of his money at work in consumer discretionary stocks as of June 30. That was more than double the S&P 500's 9%.

His consumer weighting is due to homebuilders. He went on a buying spree in mid-2008.

Based on the group's history, he expects names like D.R. Horton to rally next spring.

He also had 47% of his dollars plowed into information technology names. The S&P 500's weighting was only 18%.

"Coming out of a recession, tech is one of the sectors that do best," he said. "That lasts about two years. But if I waited for unemployment to drop, it would be too late."

The fund's buy-low mantra helped limit its losses last year. It was down 34% vs. the S&P 500's 37% setback.

Yet its focus on growth is helping it this year. The fund was up 43.93% going into Monday. Its large-cap growth rivals tracked by Morningstar averaged 30.81%. The S&P 500 was up 22.80%.

Eye On Bargains

Over the past three years the fund's average annual gain was 0.73% vs. -5.30% for its peers and -3.25% for the S&P 500.

Accenture was a top buy by the fund as of its latest disclosure.

The recession and market sell-off hurt the management and tech consulting firm. "We felt it would not stay down forever," Dodson said. "When the recession ends, companies will invest in tech again."

Earnings per share have contracted for three quarters. Analysts polled by Thomson Financial expect it to fall this quarter as well.

But they're forecasting an upturn or flat result in the three quarters after that.

The stock is up 19% for the year. Return on equity has been a lofty 48.2%, 58.7%, 61.8% and 73.5% the past four years through fiscal 2008.

The fund bought eBay (NasdaqGS:EBAY - News) this year after having sold its stake in 2008. The stock is up 75% this year.

Return on equity has increased for two years. EPS rose every year this decade. The past five analysts' revisions for this fiscal year were upward. The three most recent revisions for next year also went north.

AGL Resources was also a top buy as of the fund's latest disclosure. The natural gas distributor is up 18% this year. Analysts are forecasting three quarters of slowing EPS and sales. Still, as a regulated utility, AGL gives investors relatively consistent financial results.

Energy Outlook

"Also, they have an exploration and production unit," Dodson said. "Energy prices, which are low, will climb as the economy gets better."

Goldman Sachs was a top holding as of the fund's latest disclosure.

The money-center bank is up 118% this year. Shares were clobbered during the downturn. EPS plunged each quarter of 2008.

EPS has accelerated since then, rising 5%, 8% and 190%. The bank benefited from the demise of key rivals.

Buzz up!