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Apple, Little Understood, Is Best-Run Company

2:08 AM
Apple, Little Understood, Is Best-Run Company
Erick Maronak, manager of the Victory Large Cap Growth Fund, says Apple is the best-run company in the U.S., helping to make it the most attractive stock investment.

The $80 million mutual fund, which garners three of five stars from Morningstar, has returned more than 36% over the past year. The fund has risen an average of 2% annually during the past five years, better than 72% of its Morningstar-tracked peers.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their stock picks and views of the stock market in five fast questions.

Are you bullish or bearish?

Maronak: We are bulls on the stock market but even more bullish on high-quality growth stocks. The current focus on sovereign debt risk, uncertainty regarding regulatory changes and policy decisions is obscuring evidence of a solid, but gradual, recovery. U.S. industrial production increased at an annualized rate of 10% over the last seven months, and the global picture is not much different.

With more than 80% of companies having reported earnings, results have been strong with greater than 50% surprising on the upside. Not surprisingly and consistent with the prior two quarters, companies that exceeded revenue expectations in addition to beating EPS estimates performed better than those that simply had positive earnings surprises. Cost-cutting can only go so far. Therefore, companies that can show true demand in terms of revenue growth are awarded a premium. We believe the same can be said of the overall market. Following last year's broad bounce off the March lows, an encore performance in 2010 will be much more challenging. The list of winners will naturally shorten, but those companies that make the list should enjoy relative premiums in terms of stock performance. Our view is that the investing environment has shifted from rewarding investors for simply staying in the market to being in the right stocks.

What is your top pick?

Maronak: Choosing one is difficult, so I'll provide two. Apple and Teva Pharmaceuticals are top picks due to their dominant industry positions, strong financials, capable management teams and the ability to provide 17% to 20% growth against very reasonable valuations.

Apple is hardly undiscovered yet not fully understood. Arguably the best-run company today, Apple has five segments in computing, consumer electronics, phones, software and retailing. Despite having excellent growth prospects, the company sells for a P/E multiple of 18, a cash flow multiple of 10, has $40 billion in cash and equivalents and no debt. Our view is that the recently announced iPad will sell well and that the next generation of phones will be a big boost to earnings.

Teva is just as dominant in generic pharmaceuticals and, given the dollar value of branded pharmaceuticals that are expected to lose patent protection, the company's growth prospects look as healthy as ever. The vertically integrated generic manufacturer will benefit irrespective of any health-care reform as it provides the lowest-cost alternatives to branded companies. The $50 billion company is expected to grow earnings 17% yet sells for 14 times 2010 estimated earnings.

What is your top "sleeper" stock pick?

Maronak: Given the underperformance against solid earnings, strong financials and attractive growth prospects, Activision is a sleeper pick worth considering. We believe the company's attractive results have been overshadowed by general concerns of a slowdown in consumer spending in this gaming category as evidenced by Electronic Arts and GameStop. Activision, however, has a better title lineup, robust recurring monthly revenue from World of Warcraft and has just announced a stock-repurchase program.

What is your favorite sector?

Maronak: A favorite is always difficult for us to choose as we emphasize company fundamentals and see attractive opportunities in most sectors. That said, health-care represents a particularly interesting combination of growth and compelling valuation. Companies like Celgene and Teva Pharmaceuticals sell for less than 1 times their EPS growth rates of 24% and 17%, respectively. The lack of relative underperformance in 2009 was attributable to regulatory uncertainty and investor preference for investing in the worst-performing sectors. As fear from health-care reform initiatives subside and investors look for opportunities in sectors that have trailed in performance, health-care companies stand to attract renewed investor attention and funds.

Which sector or stock would you avoid?

Maronak: As much as we dislike generalizations, it's hard to ignore the challenges of telecommunications services. In many ways, the success Apple has enjoyed has come at the expense of AT&T. Over the past three years, network traffic on AT&T's network has increased 50-fold yet revenue has increased only eight times. Worse yet, the most lucrative segment of revenue for carriers, text-messaging services, are being replaced by the least profitable, bandwidth-hogging data streams. Three percent of Apple iPhone users represent 40% of AT&T's traffic. With smart phones growing at 30% per year and application downloads in the billions, the problems will only become more acute, forcing carriers to spend billions upon billions on capital expenditures.

Reported by Gregg Greenberg in New York.

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