Growth With Lower Volatility

AIM Funds' Craig A. Smith uses earnings as the key to long-term positive returns

Maintaining discipline during good times and bad is what Craig A. Smith, vice president and senior portfolio manager for Houston-based AIM Funds, says leads to superior returns over the long term. Smith is one of a team of three portfolio managers and three analysts that manage the AIM Balanced Fund (AMBLX), AIM Global Utilities Fund (AUTLX), AIM Global Infrastructure Fund (GIFAX), and AIM Global Financial Services Fund (GFSAX).

For this month’s Private Screening, Smith, a 12-year veteran with AIM, chose to focus on the investment strategy used by the AIM Balanced Fund to make his picks, although, he admits, “performance [of the Balanced Fund] over the past 18 months has not been what we’ve wanted–it’s been poor.”

Smith says the goal of the AIM Balanced Fund is to produce equity like returns with lower volatility. He expects that AIM investors will accept a three- to five-year time horizon for their investment goals so, he would not give us 12-month price targets. Last year, since value stocks did better than growth stocks, his investment style was out of favor. But with the Fed’s rate cuts beginning to take hold and earnings showing signs of stabilizing, he expects a turnaround soon.

“We don’t want to just buy pure earnings momentum. We want to buy growth at a reasonable price,” Smith explains. He says earnings are the key to growth and “companies that are able to produce positive earnings results vs. expectations tend to keep producing those positive results for some period of time.” Smith also favors “core companies–everyday names that you would recognize but are growing greater than the average stock and have been doing it for a long time.”

Smith likes the following stocks:

Calpine (NYSE: CPN) is an independent power producer that has established itself as a reliable supplier of power to the United States and the world. Its value has fallen recently, and at $31.75, Smith believes it has the ability to grow 30% over the next three to five years.

Recent acquisitions have given biotechnology company Genzyme Corp. (Nasdaq: GENZ) an enhanced platform to develop treatments for 20 diseases. Its promising treatment for dialysis patients may become the “preferred treatment” for many. Smith feels the stock can advance its earnings 22% over the next three to five years from his recommendation price of $54.89.

Retail discounter Target Corp. (NYSE: TGT) is a quality company that Smith believes is currently undervalued. The company’s plan to bring its credit operations in-house should pump up earnings, which will also accelerate when the economy picks up again. Smith sees 15% growth from $35.89 in August.

J.P. MorganChase & Co. (NYSE: JPM) is a stock Smith says is poised to do better as the economy improves because it has aggressively cut costs. The global financial services company is a value at the recommended price of $40.72. He expects it to grow 12%.

Smith says Microsoft Corp. (Nasdaq: MSFT) is a good buy because “it has increasing earnings and it has great appreciation potential because it is a core technology name.” Recommended

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