Aram Green, who manages the $578 million
Legg Mason Partners Small Cap Growth Fund
, said the stock market won't return to a low reached in March because the government's trillion-dollar stimulus packages and bailouts are taking effect.
Green favors companies as diverse as fast-food chain
, software maker
and biotechnology firm
The fund, which is rated four out of five stars by
, has returned 9.2% this year, more than twice that of the benchmark
Growth Index. It has fallen an annual average of 10% and 0.4% over three and five years, respectively, also beating the Russell index.
He offers his investment ideas in the
Fund Manager Five Spot
, where America's top mutual fund managers give their best stock picks in five fast and furious questions.
Are you a bull or a bear?
We are bullish longer term but believe in the near term, given the quick upward move since early March in the equity markets coupled with many still unanswered questions. We are confined to a choppy stock market through summer.
We remain hopeful that the market "bottom" passed a few weeks back. Though it is unclear what the long-term price will be for such actions, the banking system in the U.S. has been "saved." The federal government has been fervently pumping money into the system and there are some early signs the enormous policy stimulus and intervention is starting to work. The collapse of credit spreads and the improving ability for companies to access capital, albeit at higher rates than in prior years, gives us comfort that we have entered a period of greater stability in the markets.
We feel confident we have seen the lows in the market, and we will not be returning to the pandemonium-like environment we experienced earlier this year. That said, there are still many questions that need to be answered for investors to determine what the recovery trend will look like and what the long-term impact will be from these aggressive government-led measures.
What is your top stock pick?
One of our top holdings is Burger King. Most of us pass by a Burger King every day as we run errands or commute to and from work, but many people are unaware of the company's global expansion opportunities and its ability to improve margins through a number of company-specific operating levers. Burger King's business should also participate in the trade-down effect as consumers seek out better value alternatives at meal time. Burger King's quarterly results were negatively impacted by several transient issues, which we believe will be behind us in the next few quarters. These results have knocked down the stock and provide a compelling entry point for long-term investors to buy a global franchise growing faster than its largest competitor,
, while trading at a cheaper valuation.
What is your top "beneath the radar," or "sleeper," stock pick?
Small-capitalization stocks have been the under-followed equity class for years. However, given the decline in the number of analysts researching these stocks at large investment banks, most of the names we own we think of as "under the radar."
We have a handful of names in the Legg Mason Partners Small Cap Growth Fund that have little to no institutional coverage. This is a fabulous opportunity for the fundamental research team at ClearBridge Advisors (the fund's sub-adviser) to uncover hidden gems and truly understand the business models of the companies we own better than almost anyone else. Some of the stocks we own in this category include
Corrections Corp. of America
What is your favorite sector?
Software companies possess a number of the qualities we are looking for when evaluating new investments for the Legg Mason Partners Small Cap Growth Fund. They typically have a majority of their sales derived from recurring revenue streams from maintenance and support contracts, the businesses have strong free-cash-flow properties, and we expect a considerable amount of M&A activity in the space which could mean some of our smaller-capitalization software stocks are acquired by the giants in the industry like
, as those heavyweights look for acquisitions to grow their businesses.
These stocks have been among the best investment areas because they have good defensive properties given their higher recurring revenues, most of which are under multi-year contracts and have extremely high renewal rates. Since most software companies manufacture and sell tools to improve business functionality and operations, should the economy start to improve and corporate budgets grow again, we think this sub-segment within the information-technology sector will continue to outperform. Some of our best investments in the software group include
( LWSN) and
Which sector or stock would you avoid?
An outsized number of publicly traded small-cap biotech companies are working on compounds that are years away from being proven drugs, and many will fail to reach that milestone. These companies have high cash-burn rates and only have enough cash to last the next six to 12 months. We think of these types of companies as binary investments. Either the drug works, or the results from years of clinical studies do not meet the desired endpoint, the cash is consumed, and the stock is worth close to zero.
Since most of these small-cap biotech companies have no revenue streams today, and therefore no cash flow, it is challenging to calculate what we should pay for these potential prospects. This is not how we invest our clients' capital that has been entrusted to us to protect and grow over the coming years. Instead, we have invested in biotech companies that have a drug in the market or have a proven drug ready for commercialization, have enough cash on their balance sheet to expand the business to profitability and, in some cases, have a larger partner like
that will help them reach doctors or patients internationally.
Examples of these owned in the Legg Mason Partners Small Cap Growth Fund are
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.