Amid the worst economic and financial crisis this generation has seen, all stocks generally moved in tandem. But the game has now changed, according to Jeff Lindsey, Managing Director and head of BlackRock’s Fundamental Large Cap Growth equity team, who says success or failure in investing today will depend on getting the individual stock fundamentals correct rather than on the likelihood of a particular economic scenario playing out.

The major stock market averages ended 2009 on a high note, notching impressive gains after rallying off their March lows. But the ride was and continues to be bumpy, and not all stocks have been winners. With the market due for a slowdown and the economy gingerly emerging from the worst recession in the post-WWII era, Managing Director and portfolio manager Jeff Lindsey believes investors are wise to be discerning in their choice of investments. In this interview, he describes the current environment as a stock-picker’s market and offers insight on large cap growth investing.

Q. Where are the opportunities in the stock market today?

Jeff Lindsey: The opportunities today are more stock by stock rather than sector driven, thereby our characterization of this being a stock-picker’s market.

Opportunities can be found across various industries among companies that are reestablishing their growth rate post-recession or simply good old fashioned growth companies that are experiencing a new product cycle and exhibiting strong growth for that reason. We’re finding a lot of these types of opportunities right now, as opposed to having to choose among a host of companies grappling to survive the environment. We don’t have to concern ourselves as much with the economic backdrop or even what sector a company is in. We’re looking at each company for its prospects and stock price.

Q. Generally speaking, given the run-up in stocks since March 2009, is now the time to be defensive or opportunistic?

Jeff: We still remain somewhat opportunistic. The run-up came from a very low level, so we find that stocks are still attractively valued relative to their growth prospects. That leads us to seek out and continue to emphasize what we would classify as the higher-growth companies.

Q. Why do you believe it’s a stock-picker’s market?

Jeff: For several quarters, when things were looking very dim, the economic backdrop was the single most important factor in assessing companies for investment. That simply is not the case any more. Companies are increasingly back to business as usual, focusing on their people, their products and their sales prospects. In our view, success or failure in investing these days is going to depend much more on getting the individual stock fundamentals correct rather than on the likelihood of some particular economic scenario playing out, whereby some types of companies might hold an advantage over others.

Q. What exactly does this mean to you? Is the macro environment irrelevant in choosing stocks today?

Jeff: This stock-picker’s environment plays to our strength. Our style of managing portfolios is bottom-up, one stock at a time. We look at the individual company first and everything else second. This is how we’ve generated excess return over time. So, ultimately, what it means is that we don’t necessarily have to concern ourselves quite so much with those outside factors. We always take into consideration the industry, the fundamentals and the geographies in which a company operates, but individual company fundamentals are by far the most important factors to analyze. That’s how our decisions are made.

Q. How do you go about separating the winners from the losers in this type of environment?

Jeff: This is a time when companies gain or lose significant market share in their businesses. They’ve had to deal with a bad environment and they may or may not have invested throughout that environment. They may not be prepared for what’s next. So it’s a particularly interesting time to try to identify the market share winners and invest in them. Of course, we’re always looking for companies that are producing results beyond expectations, even if those expectations are optimistic.

Attributes we might look for in a company today, in the aftermath of the “Great Recession” in the US and the worst credit crisis of our generation, are less reliance on debt given the problems in the credit markets and more exposure to emerging markets as a source of growth. Emerging market economies are poised to grow at a faster rate than the US and other developed economies.

Q. Can the average investor succeed in this environment or is special expertise required?

Jeff: Many companies have experienced dramatic change and, for that reason, really need to be reanalyzed to fully understand their future prospects. Fundamental research—digging deep to really get to know a company—is of critical importance, particularly during and after periods of significant change. To us, that means meeting with CEOs, suppliers and competitors in an effort to get at a complete and true picture. This type of analysis can be difficult for individual investors to undertake.

Investors can look to company guidance and news flow, but these resources are limited, at best. We find that companies are offering less guidance than they have historically, choosing to say less or be less specific about their future prospects. This makes it harder for the individual to make confident investment decisions. Meanwhile, headlines are frequently misleading and often ‘old news’ to those of us who have been following and researching a company for some time.

We find that the headlines are less often news and more frequently the final recognition of something that we had been anticipating. This is why stocks sometimes go down on a seemingly good headline, because it really wasn’t good enough, or vice versa. So, this can really complicate matters for the individual investor. We’re fortunate to have the team, the technology and the global resources of BlackRock at our disposal.

Q. Describe your process for identifying stocks.

Jeff: Our team of five investment professionals, each with sector expertise, conducts fundamental research to identify both stable growth stocks and opportunistic stocks that we believe can offer significant capital appreciation potential. We consider all US stocks with market capitalizations greater than $2 billion. We believe intensive fundamental research is the best way to understand prospects, predict stock performance and uncover price inefficiencies for large-cap growth companies.

We meet with company CEOs, attend industry conferences, gather data from both internal and external sources and develop our own internal earnings projections in order establish an investment thesis for each company we invest in. Each company is chosen for its own individual attractive characteristics. That’s the crux of our bottom-up approach.

Q. How do you balance stability and opportunity in an investment portfolio?

Jeff: In the portfolios we manage, we typically will aim for an allocation of two-thirds stable growth and one-third opportunistic growth, although we allow the weight to shift as investment opportunities arise. Flexibility is an important component of our strategy that, we believe, enables us to be successful investors in the large cap growth space regardless of the environment and the overall direction of the market.

Q. As a growth manager, are you able to find suitable opportunities in a slow-growth economy?

Absolutely. In fact, we would argue that, against a slow-growth backdrop, growth companies are able to shine. These are companies that have internal growth generation. They are introducing new products, expanding geographies, adding sales people, taking market share, making acquisitions; they don’t rely on a fast-growing economy to propel them along. So, true growth companies can really distinguish themselves in this type of environment. Conversely, in a high-growth environment, everyone is growing.

Bottom line: We believe a slow-growth environment can be a good backdrop for growth investing because the market recognizes the strength of that growth premium relative to other companies and, eventually, investors will acknowledge and pay up for those stocks.

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