BOSTON ( TheStreet) -- It's commonplace to see stocks such as gadget giant Apple (AAPL - Get Report) and chipmaker Qualcomm (QCOM) in so-called growth mutual funds. But Kleenex company Kimberly-Clark (KMB - Get Report) and Pampers purveyor Procter & Gamble (PG)? Not so much.
Keith Goddard's Capital Advisors Growth Fund (CIAOX) holds a mix of shares that tend to post fast earnings growth and stable companies with consistent revenue. The mutual fund manager is steeling himself for a possible collapse in stocks in Europe, which could take the U.S. stock market down with it.
"We're a growth fund, but we have a much deeper focus on downside risk management than most," Goddard says. "The problem with growth funds as an asset class is that they typically capture 108% of the downside of the market and then they capture 108% of the upside. When you do the math on that, you aren't building wealth that way. You have to keep more of the gains, otherwise it doesn't work."Goddard's growth fund focuses on any company with evidence of positive change, momentum and attractive values. His concentrated list of 30 to 40 holdings -- which also include turbine and appliance maker General Electric (GE - Get Report) and discount retailer Wal-Mart (WMT) -- has outperformed the S&P 500 over the past three and five years, though it trails over one year. In explaining the diverse set of holdings in his fund, Goddard notes the difficulty of gauging other investors' reaction to the Eurozone sovereign debt crisis. EU leaders haven't agreed on a concrete plan of action that would prevent a debt crisis from spiraling out of control. As the manager of a mutual fund, Goddard says protecting clients is key. "Greece is going to default, there's no debating that. But will it be orderly or disorderly?" Goddard asks. "Where do you want to be when you know you have this potential crisis out there? One thing you can do to defend yourself is to own stocks that are already there from a valuation perspective." The Capital Advisors Growth Fund portfolio owns several traditional growth stocks, with Apple as the fund's second-largest equity position as of June 30 with a weighting of 4.5%. Internet search company Google (GOOG) is also among the fund's top holdings. The fund's other positions, though, aren't typically classified as hot growth stocks. Companies like snacks producer PepsiCo (PEP), phone company AT&T (T), Band-Aid maker Johnson & Johnson (JNJ) and Wal-Mart all have weightings of 2.7% or more in the fund. Yet, Goddard is targeting returns on these stocks that would rival those of the most popular growth companies, which boast attractive valuations and yields. "You need stability and you need lower volatility," Goddard says. "Dividends are a great way to do that. These stocks are dirt cheap relative to their own histories. It's a combination of risk management as well as valuation." Goddard has put cash to work with some of the blue-chip stocks as he's regularly measuring the risk climate in the stock market. Goddard uses three metrics -- valuation, trends and risk -- to get an objective score. He prefers to use normalized 10-year average earnings to find stocks that trade at low valuations, with the expectation that the worst is already priced in. "Estimates are frequently wrong and profit margins are such a key part of that equation and they are much more variable than people think," Goddard says. "We have been in the most expensive quartile of that range since the end of 2009, so the market has not been cheap for a long time even though everyone says the forward price-to-earnings ratios are so low." Instead of looking at the S&P 500 against this year's or next year's estimates, as many investors do, Goddard says he's happy if he can find stocks that already trade at 12 or 13 times their 10-year average earnings. "That's where the stock market would likely bottom out as a whole in a bad scenario," he says. Goddard offers up several stocks where he sees growth potential, which TheStreet outlines on the following pages.
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