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A Focus on the Research Process
James L. Cross, CFA 1
Vice President,
Research Analyst and Portfolio Manager
Franklin Equity Group
The Franklin U.S. Growth team's philosophy emphasizes investing in high-quality companies with the potential for long-term sustainable growth can provide significant opportunities for investors. We continue to use a bottom-up approach to investing in companies that meet our criteria for growth, quality and valuation. A team of 35 analysts, who cover hundreds of stocks in multiple industries, helps to ensure this philosophy is maintained. Through our proprietary research, we search for opportunities to invest in well-managed and well-capitalized companies with clear drivers of growth. Perhaps the best way to explain our research processýfrom the first time we hear about a company to the final decision to invest in it-is to tell the story of how we decided to invest in a developer of thermal imaging for infrared technology that is used in military and commercial applications.
Our team was first introduced to the firm in late 2002 when an analyst heard that the company had hired new executive management who promised a turnaround. At that time, we met with corporate leaders and considered the company as a possible investment opportunity. However, we weren't convinced the defense-contract dependent company would be able to sustain its sales growth once the U.S. military scaled back from the conflicts in Iraq and Afghanistan. Three and a half years later, the corporate management returned to meet with us and they had delivered on their promised turnaround. Nevertheless, we remained skeptical since a high percentage of the company's sales were still dependent on one driver of growth, defense.
Four years later, we learned from defense industry sources that infrared cameras would be significant components in a multitude of upcoming requirements for better security around critical infrastructure, such as nuclear power plants. With this news, the quality and sustainability of growth at the company began to improve, and we developed more of an interest.
Later in the year, an auto analyst informed us that the firm's technology would be used to install night vision in luxury vehicles. These additional opportunities for the company's technology and products impelled us to do an in-depth analysis and look at it from every angle. We made the decision to purchase shares for the first time in late 2006, and in 2007 the stock price rose strongly. In early 2008, returns increased again before ending flat by the end of the year, which was great outperformance relative to the rest of the market in 2008.
To summarize, new management was hired at a company that was not performing well and they were able to dramatically improve it. A short time later, two additional markets for the company's products, beyond its existing core military sales, opened up. The corporation has continued to gain market share, even as U.S. military deployment has been winding down. We believe its potential for growth provides us with a 10- to 20-year investment opportunity in what we regard as a very high-quality company.
Please click for more information on the following funds:
FTIF - Franklin U.S. Equity Fund
FTIF - Franklin U.S. Focus Fund
FTIF - Franklin U.S. Opportunities Fund
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