Just how do you value those go-go large-cap stocks these days? After leading the overall market last year, the same big, household names aren’t cheap. And to top it off, earnings growth (in the low teens last year) is expected to fall off a few percentage points in 1998. The Standard & Poor’s 500 is estimated to grow 6%-8% this year.
That doesn’t seem to faze Eddie C. Brown, who feels the coming year is one for his Brown Capital Management Equity Fund to shine. Brown says his plan starts with companies that should handily beat out the S&P 500’s growth rate. Currently the Equity Fund’s portfolio has an average estimated earnings growth rate of 19%. Next, a stock has to beat out the S&P’s return on equity, Brown’s portfolio does, with a 23% ROE for 1998, exceeding the S&P’s 21%. Finally, Brown says, he’s got his limits, and intends to pay but so much for any stock in the fund. Put into practice, that means that Brown’s average stock is currently trading at 22 times projected 1998 earnings, a little above the S&P level.
But Brown’s not wedded to large caps alone. “I actually think small- and mid-cap stocks as a whole will do better this year,” he says, “They’ve underperformed the market, and their valuation is very attractive.”
Put the formulae together and you’ve got “a lot of bang for the buck,” says Brown, enough in fact to fuel an average annual return of 24.46% for the last three years. That tally, according to statistics compiled by Lipper Analytical, would place Brown’s fund as 24th in a field of 10 1 no-load capital appreciation funds.
A 27-year veteran of the investment business, Brown is arguably a dean among African American portfolio managers. His Baltimore-based firm, Brown Capital Management, currently manages $3.6 billion for clients like the State of Oregon’s pension funds and Texaco. After graduating with a bachelor’s in electrical engineering from Howard University, and a master’s in the same discipline from New York University, Brown went in another direction. He picked up an M.B.A. in finance from Indiana University in 1968, and then headed to Baltimore’s T. Rowe Price, a fund management firm. He stayed there until 1983, when he struck out on his own.
Brown hasn’t looked back since. He’s gained quite a bit of fame in the industry, regularly beating out the S&P 500. In 1996, Louis Rukeyser named Brown the first African American inductee to the show’s Hall of Fame. Brown’s firm also runs a Balanced Fund and a Small Company Fund.
He will tell you his portfolio of 30-50 stocks is built from the bottom up. Translation: the fund looks for outstanding companies rather than sectors. What gets in and what’s cast aside, Brown says, is determined by a Darwinian approach. “It’s strictly survival of the Fittest,” be jokes.
One stock that illustrates Brown’s strategy is Home Depot (NYSE: HD), the fix-it-up home improvement chain. Home Depot, Brown says, dominates the home-improvement market and is building new outlets. What’s