News & Our Thinking

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Large Cap Growth

Large Cap Commentary – July 2011

23 September 2011

Over the past several months we have been touting our preference for companies possessing organic growth as opposed to benefactors of cyclical growth.  We held this view for two reasons; the first was that organic growth, or growth based on the unique products or services of a business, is generally more sustainable than cyclical growth, or growth solely dependent upon economic cycles.  The second reason was that as we surveyed the investment world, we did not believe we were paying a premium for the high quality of growth that organic affords.  In our eyes, we were being given an opportunity to lock in higher revenues and earnings prospects for the portfolio as a whole and not be charged for the improvement – certainly one aspect of favorable odds.

This opportunity occurred against the backdrop of expected slower growth.  As we have stated, we believe we are in the slow down period of the market cycle, where absolute growth is positive, but growth rates are declining.  We believe this period will differentiate the drivers of growth for companies into the organic versus the cyclical buckets.  After this process of differentiation, we expect investors to pay more for companies that have inherent growth prospects.

However, recent second quarter earnings results coupled with increasing fears in Europe and inWashingtonhave hastened the differentiation process.  Recently, the attitude of investors seems to have turned 180 degrees within a matter of weeks.  For example, when looking at stocks within the Industrial sector – known as a relatively cyclical sector – the change in viewpoint is obvious.  Stock after stock is down on both a relative and absolute basis. Caterpillar, Deere, Boeing, United Technologies and General Electric are a group of well-known and well-respected industrial companies included in the change.

Again, we believe this is the precursor for differentiation among companies.  In our portfolio we hold companies such as Herbalife (HLF), a global provider of weight management, nutritional and other supplemental products.  HLF posted second quarter results that included year-over-year organic sales growth of approximately 20%, well above Wall Street expectations, and earnings growth of 33%.  Another company in our portfolio, CBS Corp. (CBS) reported 8% revenue growth and 128% earnings growth, as the company continues to pursue deals to monetize its content, a process that should extend for years.

In closing, HLF and CBS are examples of the types of companies Argent seeks; those able to drive growth by leveraging the unique aspects of their businesses. Certainly, not every stock in our portfolio will succeed to the level of HLF or CBS, but creating a portfolio of companies with higher growth prospects increases the odds of positive relative results as we continue into the slowdown phase of the market cycle.  As always, we appreciate your interest in Argent Capital Management and hope you will mention our name to others.

Ken Crawford
Senior Portfolio Manager

Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change.  Not all Argent clients may own each stock discussed in this overview.  Argent portfolio managers may recommend the purchase or sales of these and other securities for their client’s acounts.  A list of all stocks recommended by Argent during the past year is available upon request.  Past performance is no guarantee of future results.