High-Quality Growth Companies for the Long Term

Grant Bowers
Vice President and Portfolio Manager
Franklin Global Advisers

It has been an interesting time to be a growth investor. Earlier in 2009, we saw extremely attractive valuations on many world-class companies. We used this opportunity to invest in what we consider to be fantastic growth companies at prices we thought we would never see.

Based on what we are currently seeing in the markets and what we are hearing from companies we visit, it appears that the worst of the recession is behind us and the U.S. economy is likely to continue to grow at a modest pace in 2010. Companies are starting to restock low inventory levels to meet expected consumer demand in the coming year. This spending, along with reasonable amounts of stimulus left in the pipeline, could bode well for job creation in 2010 and could potentially stimulate growth further.

During this time, and as always, we remain focused on our philosophy of finding long-term sustainable growth companies. These are companies that are innovating, growing and driving economic growth for the country.

Two areas where we are finding opportunities are the technology and health care sectors.

Technology investments, in our view, are required for companies to remain competitive in the global economy. We focus on technology companies whose products drive lower costs, improve productivity and, as a result, potentially lead to increased profitability. Many of our technology investments have strong competitive positions in the marketplace, generate significant free cash flow and have low levels of debt. Given this backdrop, it is not surprising that we are starting to see quite a bit of merger and acquisition activity in the technology sector.

A technology sector holding we like is MasterCard, which is a global leader in credit card processing. The company collects fees from processing credit card transactions on its network; it does not assume any credit risk for the card holder. We think MasterCard's competitive landscape is excellent, with only a few true global competitors, and that the company is a high-quality growth holding for the long term. Its financial returns have been strong, and as the economy continues to improve and consumers return to spending, the company stands to potentially benefit from the changing landscape.

Currently, we are also finding investment opportunities in the health care sector. Uncertainties surrounding health care reform in the United States have resulted in valuations of many health care sector stocks becoming very inexpensive on a historical basis. We believe that this has created some of the best buying opportunities in U.S. growth stocks at the moment.

One particular area of interest is biotech. We are seeing biotech driving innovation, particularly in the pharmaceutical industry and its creation of new drugs. We believe these are innovative companies with high-quality business models for the long term.

The market rally in 2009 has been very narrow, and we have seen outstanding performance in lower-quality, highly levered companies, while many high-quality companies were left behind. We expect that as the market stabilizes, the focus may shift away from these riskier companies and toward higher-quality growth companies. Consequently, we believe our long-term focus on owning high-quality, high-growth companies could potentially serve us well in the days ahead.

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