Pro Investor Sticks With Highfliers as Stocks Sink

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 ( 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 ( 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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Company Profile: Baidu is the biggest Chinese-language Internet search provider, similar to Google ( GOOG) in the U.S.

Current Share Price: $108.41 (Sept. 30)

Sansoterra's Take: The RidgeWorth Large Cap Growth Fund has held shares of Baidu for a while, and Sansoterra continues to list the pick thanks to Baidu's dominating position in China.

"They've done a very good job of playing within the rules and confines of the Chinese government," he says. "Being Chinese based and owned, Baidu has done a fantastic job of what Google has done everywhere around the globe with the exception of China."

Sansoterra notes that Baidu has gained advertisers and search-engine users by adding a number of keyword searches, which enables the company to deliver good quality results. In the second quarter, Baidu said revenue surged 78% while net income rocketed higher by 195%. Shares of Baidu are up 12% this year, even as the broader market has stumbled. Part of that can be attributed to Baidu's move into different businesses.

"It's growing like a weed," Sansoterra's says of Baidu's expansion. "They're expanding into mobile operating systems and other tangential businesses to search. That drives more search and more advertising revenue. We're in the very early innings of China's total use of the Internet."

BE Aerospace ( BEAV)

Company Profile: BE Aerospace is a provider of products and services for the commercial, business jet, and military-aircraft markets.

Current Share Price: $33.50 (Sept. 30)

Sansoterra's Take: BE Aerospace is a smaller-cap stock on a relative basis for the RidgeWorth Large Cap Growth Fund, as the company has a market cap of about $3.5 billion. Sansoterra likes BE Aerospace because of the cyclical growth story.

Sansoterra notes that, during the height of the financial crisis, airlines were grounding planes and parking them in the desert. Many were older planes that were less fuel-efficient. These planes were used for parts as planes in the fleet needed repairs. With the economy slowly recovering, Sansoterra is expecting BE Aerospace to be a big benefactor as people fly more and more.

"Aerospace is a later cycle play because airlines struggle and they underspend on planes," he says. "Earnings estimates on companies like BE Aerospace were coming down drastically in early 2009. Now, the companies in the industrial space had more of a chance to beat expectations. There have been a lot of additional content added to make flights more interesting and comfortable. This retrofit business is picking up and, at the same time, there is a wide-body set of planes that are slowly being ordered again."

BE Aerospace's financial data is reflecting that success already. In the second quarter, revenue rose 25% from a year ago while profit increased nearly 50%. BE Aerospace shares, though, are lagging the overall market, down almost 10% in 2011. However, the stock is up 10% over the past 12 months.

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Company Profile: is a travel Web site, offering discounts on hotels, flights, rental cars and cruises.

Current Share Price: $459 (Sept. 30)

Sansoterra's Take: Despite the 11% swoon in share price last week, Priceline has been a successful investment for the RidgeWorth Large Cap Growth Fund, up 15% this year and more than 30% over the past 12 months.

Financial and valuation data for Priceline makes the stock attractive, as the company grew revenue almost 80% year-over-year in the last quarter. In addition, the stock has a very attractive price-to-earnings ratio at 18 times forward earnings, which is slightly above the multiple on the S&P 500 but not as high as a typical growth stock.

Sansoterra, though, is more impressed with how Priceline is a solid way to play the secular trend where people manage their own travel, cutting out the middle man.

" has done a great job of finding more efficient uses of existing inventory," he says. "If you're a hotel chain and you have 10,000 rooms available over multiple hotels, there are nights when you're not at 100% capacity. They do whatever they can do to move those rooms, selling them for far lower prices to avoid leaving them empty. That logic holds for airlines and car rentals as well."

This model works not only in the U.S. but everywhere else. As the company has expanded internationally, investors are realizing the company can be much more than a domestic play, Sansoterra says. "Priceline has done a better job at executing and expanding internationally than most of their competitors," he adds.

Allergan ( AGN)

Company Profile: Allergan is a health-care company focused on consumer products. It has developed cosmetic medicine Botox, chronic dry-eye treatment Restasis, facial-wrinkle gel Juvederm and the Lap-Band adjustable gastric banding system.

Current Share Price: $83.63 (Sept. 30)

Sansoterra's Take: Allergan is a solid example of all things the RidgeWorth Large Cap Growth Fund invests in. While considered a health care company, Allergan is more about consumer products that are disruptive to the way people live their lives.

The key to Allergan as an investment is that people thought consumers would cut out the cost of Botox, Sansoterra says. "We found that, through the difficult economic environment, Allergan grew revenue and earnings through the downturn at a healthy pace. Not everyone quit their Botox injections."

What makes Allergan a real growth story is how the company has found new uses for Botox beyond cosmetic applications. Already, Botox is being used to treat migraines and urinary incontinence, among other things.

"There are lots of uses for the compound beyond cosmetic use," Sansoterra says. "That's allowed the total addressable market for Allergan to get larger and larger. The company has stayed well positioned in the higher-end consumer base, which is great from a consumer discretionary standpoint. In doing so and expanding that to other industries, Allergan can continue to grow their core base and they have other tangential markets that never existed before."

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-- Written by Robert Holmes in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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