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Investing for growth in a slow-growth U.S. market

Housing, infrastructure and technology stocks are among AGF manager's favourites.

Diana Cawfield 18 August, 2016 | 5:00PM
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In selecting U.S. growth stocks in a slow-growth environment, Tony Genua focuses on rising revenues. "If we look at the last three years, it's been a challenging environment," says Genua, a vice-president and portfolio manager at AGF Investments Inc. "The U.S. dollar has been a bit of a headwind for many S&P 500 companies, so revenues in the last three years are only up about 1%. For the companies I invest in, on average, it's up 15%, so very healthy top-line growth."

Certainly the bottom line is also there in terms of earnings per share for companies with above-average top-line growth, adds Genua. Based in Toronto, he has specialized in AGF's U.S. growth portfolios, including the $1-billion AGF American Growth Class, since 2005. He will typically spend 80% of his time on bottom-up analysis and the remaining 20% on macroeconomic analysis and valuations within sectors.

"I continue to believe that the U.S. economy is in an extended cycle," says Genua, who has more than 30 years of investment experience. "Given the lack of significant imbalances, we see the current cycle having a few years left in it, and likely remaining in the mode of sub-par growth."

Despite headwinds such as a rising U.S. dollar that makes exports less competitive, there are promising signs in some sectors of the economy. According to Genua, market leadership has emerged in economically sensitive areas such as housing-related securities and infrastructure companies.

Regarding the housing market, "new single-family homes announced for the month of May were up 6%, or 25% year over year," says Genua. "That's the strongest number since February 2008. That's why we have home-improvement company  Lowe's Co. Inc. (LOW) and  Fortune Brands Home & Security Inc. (FBHS) in the portfolio."

Many of the companies that meet Genua's growth criteria are in the technology sector, as reflected in the fund's 27% weighting in these stocks. For example, Genua is bullish on the long-term growth potential of  Facebook Inc. (FB), his top holding. "Facebook is benefiting from the trend away from traditional media, radio, print and even television," he says. "As long as that trend continues, and as long as Facebook executes on its strategy, then it will be in the portfolio." Inc. (AMZN), also among the AGF fund's top holdings, is another long-term growth story. "I am very comfortable with Amazon," says Genua, "because of their activities with the favourable trend of more and with more purchases being bought online."

On average, Genua will hold a company for two years, but some companies will be held much longer. If he believes that a company has a long runway for above-average growth, he's not going to sell its stock unless he believes that the fundamentals have deteriorated.

 Apple Inc. (AAPL) is a high-profile example of Genua's sell discipline. He sold the stock about three years ago, after having held it for eight years. "Apple is showing signs of a decline in its top line, in terms of growth not really there," says Genua. "As an investor who seeks to participate in leaders, I don't believe that Apple is such a leader because the end market is showing signs of maturity."

Genua holds 35 to 45 stocks, and employs risk constraints to achieve prudent diversification. His fund is exposed to at least eight of the 10 sectors, and he will not exceed the S&P 500 Index weighting in any one sector by more than 15 percentage points.

A frequent business traveller, Genua's research process includes meeting numerous companies in the United States and attending industry conferences. At a trade show earlier this year, he tried on a virtual-reality headset and "it was really amazing, it's a truly immersive experience," says Genua.

"That's one reason why we have  NVIDIA (NVDA) in the portfolio," he adds. "Their graphic chips have a dominant market share in the headsets. They just had an announcement this week and it looks like their graphic chips are going to end up being increasingly used in  Tesla Motors (TSLA) vehicles."

As well, when  Sony Corp. (SNE) releases its competing headset later this year, Genua thinks that could be very interesting for virtual-reality users and exciting for some of the gamers. "We see this already with the Pokémon GO app."

Looking ahead, technology remains a great area for opportunities, says Genua, whether it's in leveraging the internet with cloud-solution companies, or online commerce and payment-systems securities. Along with virtual reality, other promising areas include collaborative consumption, such as Uber, an online transportation app, or Airbnb, a vacation site, that haven't gone public yet.

For the most part, the companies held in the AGF fund do not pay dividends. "There's been a tremendous appetite by investors to perhaps seek substitutes for Government of Canada bonds or U.S. Treasuries," says Genua. "The companies I invest in are reinvesting in their business, reinvesting for growth, so investors really haven't been beneficiaries from that type of flow. It's more capital appreciation, but I feel very good in terms of the companies."

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Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.

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