QUARTERLY STOCK MUTUAL FUND REVIEW : Wall Street Slump Doesn’t Scare Off These Growth-Stock Funds

Friday’s report that job creation in March was the highest in six years terrified the bond market, and may do the same to the stock market when it opens today.

But for investors in growth-stock mutual funds, the ruckus may seem a bit absurd: If you’re investing for growth, isn’t a strong economy exactly what you’ve been hoping for? Here’s a look at how two growth-stock funds expect to gain from the economy’s long-awaited pickup. *

Clarke Adams, co-manager of the Greenville, Del.-based Brandywine Fund, figures that stock investors shouldn’t pay much attention to the bond market’s current upheaval.

Bonds are “trying to paint a picture that good news is bad. But good news is good “ for growth-stock investors, Adams argues.

Early last Thursday, as the stock market continued its weeklong plunge, Brandywine stepped up and bought. Until then, the fund had about 20% of its $2 billion in assets in cash. “We deployed about half of that cash on Thursday,” Adams said.

The fund’s concept is straightforward: Find companies with “new products or new services that can gain market share at the expense of competitors,” Adams says. If a company’s earnings surge, its stock price will inevitably follow, he says.

Brandywine’s record has been stellar: It rang up a 183% return for shareholders between 1988 and 1993. Last year the fund was up 22.6%. In the first quarter, it slipped 0.1%, versus a 3.45% drop for the average growth fund.

Despite talk of a bear market, Adams doesn’t see it--not with the economy rising. So he used last week’s market selloff to grab stocks of firms that he believes are best positioned for faster earnings growth in a healthy economy.

Among the stocks on Brandywine’s buy list last week were hospital giant Columbia/HCA Healthcare and computer networker Cisco Systems.

Technology remains a major sector bet by Brandywine, making up about 30% of the fund. Besides Cisco, the fund owns such classic tech growth names as Lotus Development and Newbridge Networks.

Adams’ search for fast growth also has led him to invest in Chrysler, GM and Ford. Despite the stocks’ recent slumps, “We think it’s pretty early” in the auto sales cycle, he says.

Likewise, Brandywine owns such economy-sensitive issues as machinery giant Caterpillar and National Gypsum, a maker of wallboard that has boomed with the rebound in housing.

What about the argument that higher interest rates automatically reduce the “fair” prices for stocks, including growth issues? Shouldn’t that mean lower growth-stock prices even if earnings soar?

If growth stocks were selling for absurdly high prices that might be true, Adams allows. But he says the average price-to-earnings ratio (P-E) of Brandywine’s stocks is 17, based on 1994 estimated earnings. Yet the average earnings growth rate of his stocks is about 50%, he says.

The upshot: Growth is cheap, Adams contends. “We think the growth sector is selling at one of the lowest P-Es relative to earnings growth in the last 30 years.”

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Warren Isabelle steered the Boston-based Pioneer Capital Growth fund to a 4.5% first-quarter gain, despite Wall Street’s slump.

Still, he concedes that he probably won’t escape if stocks continue to dive in the short run. Rather than time the market, he stays fully invested, which means he’s potentially very vulnerable in a bear cycle.

But he’s hoping that his shareholders have the willpower to stick with him through any short-term selloff. That’s because Isabelle owns a host of small, little-known manufacturing companies that he believes have enormous potential as the economy shows its muscle.

“These (companies) are going to start showing earnings momentum that nobody can believe,” Isabelle gushes.

Like Brandywine’s Adams, Isabelle’s approach to investing is “bottoms up,” meaning company by company. But Isabelle deals in smaller, more thinly traded stocks that are likely to have little or no following on Wall Street.

“We will look in odd places for value,” Isabelle says. “I look for companies that I would go out and buy myself.”

His portfolio now includes such obscure names as BEI Holdings, a real estate consulting firm that specializes in distressed properties; Avondale Industries, a Louisiana shipbuilder, and Park-Ohio Industries, a mini-conglomerate in consumer and industrial products.

Isabelle is most excited about his manufacturing names, including Furon Co., a Laguna Niguel-based producer of all sorts of plastic parts for industry. While shares of auto makers and other major industrial names have already surged, Isabelle sees smaller supplier companies like Furon as a back-door way to play the cyclical game.

Furon’s stock is at $16.50 now on Nasdaq, and barely responded to the company’s recent strong quarterly earnings report, Isabelle says. He believes the company is capable of earning as much as $2 a share (annually) at its peak, giving the stock a relatively low price-to-earnings multiple of eight based on that estimate.

Pioneer Capital Growth, only four years old, rose 37% in 1991, 29% in 1992 and 17% last year. Yet Isabelle says his $255-million portfolio should still have the wind at its back, if he’s right on the companies’ earnings potential.

“A lot of the stocks I own haven’t done anything in three years,” he says, waiting on a healthier economy.