No fear here: growth managers buy tech, materials stocks in selloff

NEW YORK (Reuters) - The sharp contraction in global stock markets over the last six weeks has been welcome news to fund managers who say that high prices kept them on the sidelines over the past year.

A trader works, as a screen shows the Dow Jones Industrial Average after the closing bell, on the floor of the New York Stock Exchange (NYSE) February 11, 2016. REUTERS/Brendan McDermid

“Clearly the market is moving away from risk overall, and we’ll take the opportunities it gives us,” said Robert Marvin, co-portfolio manager of the Hood River Small Cap Growth fund.

One of his favorites: optical communications company Lumentum Holdings Inc, which makes cables that can transmit data and video at much faster speeds. Shares of the company are up 4.5 percent year-to-date after the company beat earnings estimates on Feb 4.

Even with the selloff, stocks as a whole are not much cheaper based on valuations. The S&P 500 now has a trailing price-to-earnings (P/E) ratio of 17.1, near its historical average, even as earnings have fallen by 3.9 percent so far this quarter, according to Thomson Reuters I/B/E/S data.

As a result, fund managers are picking up individual companies that have been on their watch lists, rather than broadly buying.

Colin Morton, a portfolio manager at Franklin Templeton, said his fund has added 4 new positions in the last two weeks after largely not buying last year. He would not name the specific stocks, but said the group included chemicals companies and asset managers.

“Only a few months ago these companies were trading on valuations that were too high, but now we’re seeing share prices down 30 to 50 percent,” Morton said. Inc, Netflix Inc, and Google-parent Alphabet Inc carried the overall S&P 500 last year, yet did so largely by catapulting to valuations that left many fund managers too skittish to buy.

Amazon, for instance, hit a trailing P/E ratio of 1,510.24 on December 28th, capping a year in which its stock jumped by as much as 125 percent. After falling 25 percent since the start of the year, the stock now trades at a trailing P/E of 406.2, its cheapest valuation since October 2012, though still about 20 times more than the benchmark S&P 500.

The decline in valuations makes the share prices of holdings such as Alphabet and Facebook more attractive, said Tom Lettenberger, senior portfolio manager with BMO Global Asset Management.

“These companies are highly profitable and now have valuations that we consider reasonable,” he said.

Reporting by David Randall