BOSTON ( TheStreet) -- As mutual fund managers pile into so-called defensive stocks to shield clients from an accelerating decline in prices, the RidgeWorth Large-Cap Growth Fund's (STCAX) Michael Sansoterra is buying up highfliers that have crashed down to Earth, including Priceline.com (PCLN) and Allergan (AGN).
Professional investors have been touting large-cap, dividend-paying stocks as the best way to ride out the storm in equities. With the S&P 500 down 8% this year and more than 15% since the end of April, they've fled speculative companies for those with steady revenue and dividends. Sansoterra isn't among them.
Investors' anxiety last week reached levels not seen since the financial crisis of 2008. For all of September, the only stock-market sector to rise was utilities, by a limp 1%, while materials, energy and financial shares slumped as much as 13%. In reaction, mutual fund managers have talked up blue-chips and bonds, and hardly any have mentioned growth stocks such as Baidu.com (BIDU) and BE Aerospace (BEAV), owned by RidgeWorth's Sansoterra."We don't have an interest in 'safe.' I don't know what 'safe' is anymore," Sansoterra says. "Any stock that pays dividend in the fund is strictly coincidental. At the end of the day, we're a growth-management shop. We are investing in companies that are exceeding investor expectations." Sansoterra employs a bottom-up research approach to picking stocks, meaning he focuses mainly on a company's prospects without taking into account economic statistics or central-bank policies. Still, he's not blind to the so-called macro environment, especially with worries that Europe is on the brink of a full-blown debt crisis. The $425 million RidgeWorth Large Cap Growth Fund has performed well, with the institutional-class shares beating the Russell 1000 Growth Index benchmark this year through June 30. The fund also has a higher average annual return over the past one, three and five years. Sansoterra pins the fund's success on selecting the right stocks, regardless of whether the expectation is for a market that rises or falls. He notes that the fund owned Green Mountain Coffee Roasters (GMCR) during a trough, yet the stock outperformed expectations. "This is a staples company that has done fantastic," he says. "The reason is that they have an above-average sustainable earnings growth rate. They have a very disruptive product with the K-Cup business. And they have a strong secular trend, in that people want to lower their spend on $4 cappuccinos at Starbucks (SBUX)." How does Sansoterra search out stocks to help drive outperformance? He refuses to make large sector bets, instead looking for companies that have consistently beat earnings expectations. But that has proven to be difficult. "Growth is a scarcity," he says. "Companies that can grow faster than investors' expectations will outperform all other stocks, regardless of what the market is doing. It's difficult to find growth companies. There's a premium to be paid on growth companies that can take market share and grow earnings when everything is falling apart." Sansoterra searches out stocks that have above-average and sustainable earnings growth. In addition, the companies he buys have "disruptive" products and services that are changing consumer habits. The best example, he says, is technology, where users are shifting to tablet computing rather than clunky desktop PCs. Sansoterra says companies that can exceed expectations and offer a disruptive product or service are largely in technology, consumer-discretionary and industrial stocks. Some of his fund's holdings that meet the criteria are detailed on the following pages.
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