The world according to GARP

Tenured stock-picker Lou Holland outlasts bull and bear markets

Louis A. Holland has been in the stock-picking business since 1968, so he’s used to running with bull markets and knows how to avoid getting mauled by bear ones. To Holland, it’s all part of the investment world according to GARP-”growth at a reasonable price.” He likes a company whose price-to-earnings ratio is less than its actual growth rate.

Holland is managing partner and chief investment officer of Holland Capital Management, a Chicago investment firm with $650 million under management, including a mutual fund that specializes in mid- to large growth stocks. Holland has learned to be conservative, having lived through the downturns of 1973, 1974 and 1982. He has been to all the dances and he understands the rhythms of the market cycles.

In recent years, though, it has been difficult for Holland to find stocks based on his GARP philosophy because the stock market has been so overvalued-selling at an average 25 times earnings per share versus the historical average of 14.

Still, “we tend to do better when things are tough,” says Holland. The Lou Holland Growth Fund (Nasdaq: LHGFX), the namesake fund of which he is portfolio manger, was up 25.18% (as of 10/30/98) compared with the S&P, which was up 19.10%. All in all, the nearly three-year-old fund has enjoyed positive annualized returns, up 24.5% since its inception and ranked in the 22nd percentile in its investment category of large growth funds.

The no-load fund stays fully invested with a 25% turnover rate-so each stock has a three- to four- year investment horizon. The average stock fund has a turnover rate of 90%, meaning the portfolio manager is replacing his or her holdings with new ones about once a year.

An often overlooked point, says Holland, is that those funds that have a low turnover tend to be more tax efficient. “If a fund has a lot of short-term gains as a result of high turnover, that’s spun off to the investor in terms of income, which is taxable at a higher rate than capital gains,” he explains.

Holland favors the technology, health care and financial sectors. The Holland Growth Fund is heavily invested in Microsoft, the firm’s largest holding, Philip Morris, General Electric, Merck, Pfizer, Warner Lambert and Schering-Plough.

Holland is very bullish on the demographics for healthcare and pharmaceutical companies. The industry has undergone consolidation and restructuring and the Food and Drug Administration is approving new drugs much faster, all favorable factors, he says. “The only risk is that these stocks are still pretty high priced. Their price-to-earnings ratios are high relative to their growth rates. But this is one of the few sectors where the earnings are actually accelerating.”

Although tobacco stocks have been beaten up quite a bit, Holland likes Philip Morris. “While the company has been maligned by recent issues regarding smoking, it’s financially sound. So, whatever happens in terms of a court settlement, they’ll survive,” he says. “The stock is cheap, it has a big dividend and it has a very solid growth rate. It’s consistent

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