Growth stocks will eventually come back

- Alan Lavine and Gail Liberman

Don't, says one highly regarded money manager. Companies with rapidly growing earnings will have their day in the sun again.

John Blunden, manager of Vanguard's Growth Portfolio, which is available in Vanguard's variable annuity, says growth stocks are attractive based on prices and earnings compared to the overall market.

"Companies with superior growth and profitability characteristics usually trade at much higher premiums to the market than is the case today."

Blunden says that over the past five years, the average holding has grown earnings at almost 17 percent annually. It should grow 18 percent and 21 percent next year.

The fund owns companies with consistent unit sales growth as well as companies whose growth trends follow the economic cycle. He has a big stake in consumer services, health care, financial services and technology companies.

He says technology stocks have been weak this year because corporate spending on technology is weak. However, as the economy gets strong over the next 12 to 18 months, companies will be purchasing new technology.

"Quarter-to quarter revenues in the semiconductor industry are starting to pick up," he says. "This is generally a leader in recoveries for technology." As a result, he says he has added to his position in Micron Technology.

Every few years, growth and value stocks take turns outperforming the other. In the early 1990s, value stocks performed well. In the mid-and-late 1990s, growth stocks produced whopping gains. Over the past two years, value funds have outperformed the stock market.

During periods of extreme risk, like we have experienced over the past few years, companies with strong earnings typically underperform, regardless of their cheap stock prices. Investors stick with defensive stocks and bonds. But as growth stock prices get cheaper and corporate earnings grow, these stocks should gain favor.

The economic recovery has been sluggish. But Blunden sees earnings and the economy improving. This will favor fast-growing companies. He sees consumer spending supporting economic growth. Corporate productivity also is strong. Meanwhile companies have improved cash flows. This means they can pump money into to their businesses to boost sales. Economic performance in Japan and Europe also should help growth companies.

The fund's five largest holdings include Pfizer, Microsoft, Citigroup, Home Depot and Cardinal Health.

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Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).