Riding Big Mo In Big Growth

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Turner's Favorite Stocks | Performance Snapshot | Top Holdings

R obert Turner began tracking technology stocks in the mid-1980s, a much simpler time for investors. IBM ruled, and many of today's dominant tech players like Microsoft and Cisco Systems weren't even public. But since then, Turner, the chief investment officer of Turner Investment Partners and lead manager of the large-cap equity growth fund that bears his name, has been a momentum investor. If it looks like a company will miss earnings expectations, Turner unloads the stock. Over the last year, the fund's total return of 37.39% puts it in the top 15% of Morningstar's large-cap growth category. No doubt, a slight overweighting in health care stocks last year kept returns from being even higher. Turner holds an undergraduate degree and an MBA from Bradley University.

Q: How would you sum up your investment philosophy, Bob?
A: Earnings expectations drive stock prices. We buy companies where earnings should exceed expectations and immediately sell those if we feel the [earnings] expectations will be missed.

Q: How do you go about executing that, though?
A: We apply three criteria to the stock selection. [First, we use a] modeling process, ranking securities. [We also use] fundamental analysis and technical analysis.

Q: How does your modeling work?
A: We are ranking large-cap health care vs. large-cap health care, Merck , vs. Lilly -- not Merck vs. Intel .

Q: What about fundamental analysis?
A: Each of us within the investment team are both [fund] managers and analysts. So, for example, I cover the tech stocks, but I am also part of the large-cap growth team. And as an analyst, hopefully if something is going wrong with Nokia I will see it [before] Nokia announces [its earnings] disappointments by understanding what is happening with the small- and mid-cap companies who are supplying components to Nokia.

Performance Snapshot
(Total Returns as of January 28, 2000)

1999 1-year 1998
Turner Large Cap Equity Growth Fund 55.7% 37.39% 45.2%
S&P 500 21.00% 7.57% 28.58%

Source: Morningstar

Q: What kind of technical measures do you look at?
A: The primary focus is money flow, accumulation and distribution. Are people aggressively buying the stock during the day? Are they looking to sell it? Does it close at the lower end of its range on volume, or on the upper end of its range? We have a system in place that actually looks at that and then creates a moving average.

Q: As far as your modeling, are there any specific criteria that you find helpful?
A: For the sectors that are driven by earnings -- consumer, technology and health care -- we look at what the revisions to earnings are. How many analysts are raising their estimates vs. lowering them? What is the rate of change of earnings from one quarter to another?

Q: Do you spend a lot of time talking to companies?
A: We have a lot of management teams come though our office, and we attend conferences.

Q: In this kind of a market, are there any particular red flags that you look for?
A: Last year, we missed [high-profile blowups like] Xerox , Gillette , Lucent , Coca-Cola , Rite Aid . That's because the quality of the earnings began to deter iorate significantly prior to the company announcing the miss. So, nine times out of ten, we are not going to be there -- unless it is just kind of a bombshell like Tyco , [which] we did own.

Q: Are you concerned about how companies manage their earnings these days?
A: For several years now, companies have definitely played the earnings game, keeping expectations under control and having some reserves in place. But again it gets back to [being] good fundamental analysts.
I remember when Xerox, for three quarters in a row, [had its] revenue growth go from 12% to 7% and finally flat. And each quarter they had an excuse, and most of the Wall Street analysts bought off on that because this is Xerox.

Q: How big a premium are you willing to pay for a stock these days?
A: We never have valuation levels where we say this is just too expensive, because if we did, obviously we would have sold Cisco in 1991 or Microsoft in 1987. What we really focus on is the rate of change in revenues and earnings.

Q: You have been analyzing tech stocks for 15 years. How has the game changed?
A: Of the 200 largest tech stocks now, 62 are newly public within the last year. That's mind boggling. What happens now, because of this wide access to venture capital, you have companies being formed with a good concept and a good management team. And they come to market immediately.

Q: What are the implications of this faster pace?
A: Fifteen years ago, IBM didn't have to worry about competition. Obviously, competition eventually overtook them in the PC space and [in] the operating space. And then EMC emerged in the storage area, Sun emerged in the server area and that took several years.
Right now, if you don't keep running ahead of the crowd, you can be overtaken. We are firm believers in this gorilla stock concept. You have a fast-growing industry. One or two companies will eventually emerge as the 2000-pound gorilla, and the others fall by the wayside.

Turner Large Cap Growth Equity Fund
(Top 10 Holdings as of December 31, 1999)

Company Ticker
Microsoft MSFT
Cisco Systems CSCO
Intel INTC
America Online AOL
Wal-Mart Stores WMT
Procter & Gamble PG
Internet Capital Group ICGE
Motorola MOT
Coca-Cola KO
JDS Uniphase JDSU

Turner's Favorite Stocks