Packages move down a conveyor system were they are directed to the proper shipping area at the new Amazon Fulfillment Center Friday, Feb. 9, 2018, in Sacramento, Calif.Rich Pedroncelli/The Associated Press
Investors in one of North America's biggest mutual funds should be thrilled that Larry Puglia never got a law degree, as he originally intended. He thought the job would be too repetitive. "The more I found out about what lawyers did, the more I thought I might prefer finance," recalls the manager of T. Rowe Price's Blue Chip Growth Fund, which has $45 billion (U.S.) in assets under management.
Puglia, who's 57, has been running the fund since 1993, and he has an astonishing track record. According to Morningstar, his five-star-rated fund is a top 10 performer in its category when looking at annualized returns over one, three, five and 10 years.
His key metric for finding winning stocks is growth in free cash flow. If a company can keep increasing the amount of money it generates after paying for capital expenditures, then it's doing something right, Puglia says. However, management also "has to know how to redeploy that money," he says, whether it's through mergers, dividends or stock buybacks. He also likes to see strong earnings growth.
Patience is another part of Puglia's formula. He's happy to hang on to companies for long periods. He's owned Danaher, a Washington, D.C.-based technology and health sciences firm, for more than 24 years.
Puglia says he'll likely hang onto other companies in those two sectors for many years as well. Even though overall stock valuations are higher than historical norms, he thinks prospects for those two industries are promising.
Both sectors are also so varied in the United States that investors can create diversified portfolios within each one, Puglia says. In technology, he likes companies with healthy recurring revenues, such as MasterCard and Salesforce.com. Health care includes a very wide range of companies—from managed care providers to biotech.
True, today's U.S. market looks very frothy and uncertain. Foreign and domestic political risks abound. But Puglia has no plans to change what's been working for him for so long. The fund posted a scorching one-year return of 44% to the end of January. "We've seen a pullback in some stocks, so there are still opportunities for good free-cash-flow companies," he says.
TOP STOCKS
Amazon (Nasdaq: AMZN)
Puglia's largest holding is still redefining industries and creating new growth opportunities. "You have to determine growth potential even before looking at free cash flow," he says.
Salesforce.com (NYSE: CRM)
This software company generates recurring revenues, it's expanding, and it's global. "I don't want to miss out on the growth that's occurring in India and China," Puglia says.
Alibaba (NYSE: BABA)
The Chinese e-commerce giant is another growing global business, but it has seen some price ups and downs of late—which present opportunities. "There are these steal pullbacks," Puglia says. "Underlying earnings still look good."