Q+A-GAMCO Growth Fund dials down cyclicals

NEW YORK, March 30 (Reuters) - The likelihood of slower U.S. economic growth in coming quarters has prompted the GAMCO Growth Fund to dial down its exposure to cyclical stocks in favor of healthcare and consumer staples companies, Howard Ward, the fund's portfolio manager, said.

Ward has increased the fund's healthcare holdings to 16 percent and consumer staples to 10 percent after being as low as 8 percent and 3 percent, respectively. He said the sectors are attractive because they lagged last year and provide a more defensive tone if the economic recovery turns out to be weaker than expected.

Cyclical stocks are shares that rise quickly when the economy is expanding but don't fare well when the economy slows down. Ward said that while he believes a cyclical bias is still warranted, he is being less aggressive and more balanced with the portfolio.

The domestic growth fund has about $570 million in assets under management and was up 45.7 percent in 2009. Ward said that while he has taken some money out of technology and energy shares, the two sectors still make up the fund's biggest holdings at 26 percent and 15 percent, respectively. Apple Inc (AAPL.O) is its largest single holding at 4.5 percent.

The following is a question-and-answer with Ward.

WHAT IS YOUR OUTLOOK FOR THE STOCK MARKET FOR THE YEAR?

By focusing on the big picture, I come up with an expectation of a 10 percent to 20 percent return for stocks. The way I get there is I take the point of view that by the fourth quarter of this year, the stock market should be discounting expected earnings for 2011. If you just put a multiple of 15 on the expected earnings for 2011, you get about 1,300 on the S&P. It's a very simplified analysis, but at the end of the day, that's what it's going to come down to: S&P earnings and what kind of a multiple you put on them.

HOW DOES YOUR FUND FIT INTO THE CURRENT ECONOMIC BACKDROP?

When we look at what our companies are doing, we can make a pretty strong secular case for technology names ... anything that's connected to wireless Internet is a strong secular growth industry.

We're pretty positive on energy stocks as well, both crude oil and natural gas. I think some people are realizing the natural gas market has gone from one where the easy, cheap wells have been drilled; increasingly it's higher cost wells. If marginal costs rise, the price is going to have to rise or they won't be able to meet demand.

Our nat gas favorite is Southwestern Energy Co (SWN.N). It's the fastest growing nat gas company, the last five years its earnings and revenue have compounded at a 44, 45 percent rate, which is astounding.

On the oil side, the company we like that's most heavily leveraged to oil is Hess Corp (HES.N). Hess is also a nice size if one of these large organizations like an Exxon (XOM.N), a BP (BP.L) or a Total (TOTF.PA) want to grow by making acquisitions. Hess has a well-diversified portfolio globally and I think it's a very attractive play.

WHAT STOCKS DO YOU LIKE IN THE HEALTHCARE SECTOR?

We're pretty widely diversified in healthcare. Our best is Teva Pharmaceuticals (TEVA.TA). Then we like large cap healthcare names that make a high volume of not very expensive things, like Baxter International Inc (BAX.N). Things that hospitals have to buy like IV solutions, plasma. We want reusable stuff where they have to buy a lot of things at a low price, so Becton Dickinson & Co (BDX.N) and Baxter are two of our bigger holdings in healthcare, along with Teva.

We have smaller holdings in some of the depressed orthopedic names, like Stryker Corp (SYK.N) and cardiac rhythm management names, like St. Jude Medical Inc (STJ.N). All of these stocks have also had compressions in their multiples going back 10 years. Most of these stocks sold at over 20-times forward earnings. Now most of them sell at 13- or 14-times forward earnings.

(Editing by Kenneth Barry)