US market still offers pockets of attractively-priced growth, says ClearBridge’s Bauman

There are still pockets of value in the US stock market despite the S&P 500 being at all-time highs, says Evan Bauman, co-manager of the $3.2bn Legg Mason ClearBridge US Aggressive Growth Fund.
Bauman, who runs the Fund alongside co-manager Richie Freeman, says that, while some parts of the market are trading on rich valuations, others – including the technology and energy sectors – can offer strong growth at attractive prices.
“Valuations, relative to three or four years ago, are not cheap,” Bauman says. “There is overvaluation in areas like telecommunications and utilities, which are trading at 18-20 times earnings and have little or negative growth. However, there are pockets of opportunities in the technology, healthcare, media and energy sectors, where companies are consolidating, increasing their dividends and whose shares, in some cases, are trading at around 12-14 times earnings. With organic growth at a premium, stock selection remains critically important, particularly where valuation multiples are still attractive.”
Bauman points out that, like the market, biotechnology stocks – a key focus for the fund – are a mixed bag; partly undervalued and partly “possibly” overvalued. “It is important to discriminate between the small- and mid-cap names, where there may be pockets of overvaluation, and the large blue-chip biotechnology names which are cheap as a group and make up the bulk of the Fund’s biotech exposure,” he says.
The Fund’s blue-chip biotech names make up more than 16% of its plus-minus 18% position in these stocks, about which the managers remain very positive. “Biogen Idec, for example, is trading on less than 22x 2015 estimated adjusted earnings-per-share and has multiple promising pipeline items,” says Bauman. “The company is now expected to grow sales and adjusted earnings-per-share 72% and 42% respectively this year. Amgen, too, has a promising pipeline (including treatments for psoriasis and cholesterol), yet trades on just 14.3x 2015 estimated adjusted earnings-per-share with a 2% dividend yield. Amgen has also committed to return 60% of adjusted net income to shareholders through dividends and share repurchases.”
Among other large holdings in the Fund, UnitedHealth Group trades on less than 14x 2015 estimated earnings-per-share and the combined Forest-Actavis (now held as Actavis) trades on about 13.5x 2015 estimated earnings-per-share. SanDisk, meanwhile, trades on about 14.5x 2015 estimated earnings-per-share.
The four key sectors in the Fund, which are primarily economically defensive, are healthcare, energy, technology and media. The managers are bullish on media content and the value of owning content in the world of streaming video, prompting them to hold positions in AMC, Discovery, Starz and MSG. In general, they are primarily focussed on companies that they believe can utilise their balance sheets in a shareholder-friendly manner as well as deliver growth.
“SanDisk, for example, is returning 100% of its free cash to shareholders and we have seen Seagate’s management team become more shareholder-friendly,” says Bauman. “Companies are definitely in a ‘returning cash to shareholder’ mode. Financially-strong companies are also becoming more aggressive in putting their balance sheets to work in terms of tapping into cheap borrowing markets and making accretive acquisitions. Big acquisitions, such as the Actavis-Forest deal, are being viewed very positively by the market. And low (and, in fact) falling interest rates bode well for a continuation of the robust M&A cycle especially in healthcare, media and energy.”