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Market Missing the Growth Beneath Its Nose

Jason Stipp

Jason Stipp: In some of your funds we had noticed a notable overweight in technology stocks, and I was wondering what your thesis is on the technology stocks and why you are seeing some opportunity there?

John Calamos: Well, technology stocks, we feel, there's great opportunity there for a number of reasons. First of all, we see good top-line growth. In other words, these companies aren't simply producing good earnings by cutting the expense side out, they are really producing good earnings because their top line is growing.

The other factors that we have seen in there--what the markets ignored a year ago--was how strong their balance sheets are. Many of these companies do not have to expand their business by borrowing money and leveraging up; they have the capital on their balance sheet to expand their business.

And that's very, very important to technology companies, because as you know they have to reinvent themselves every product cycle in here. So having the capital to reinvent themselves, we look at that as being a very important component of that.

Strong balance sheets, good top-line growth, and valuations that are very compelling. These are great companies, and they're not always at great prices, but what we are seeing in the current market environment, they're great companies at very good prices. So growth companies, we think, provide some excellent opportunities in this current market environment.

Stipp: What do you think is behind that? Do you think it's still a little bit of a holdover from sort of that perceived flight to quality, like maybe growth could be riskier and so people are ignoring it a little bit?

Calamos: I think Jason you hit on that there. There is that perception, "Gee, I want a dividend-paying stock. I don't want growth." But when you look at growth versus value, for example, in a broad context and you look at the earnings and growth potential there, they're priced very similarly, but the growth potential is much more substantial. I think when we get into market environments, like we are now, is the market can't look out very far. It looks out, you know, "What about their earnings seasons coming up?" It can't really look much beyond its nose.

When the market starts to get more comfortable, it starts to say, "OK, I am comfortable now. What about next year? What about two years? What about three years?" And when the markets starts to look out two years, three years guess what we have? P/E expansion.

Now we say, "Wow!" It may be fairly priced today, but it is really undervalued looking out one year, two years and three years. When you have companies growing at some of the rates these growth companies are growing, when you start to look out, they look awful cheap today.

Stipp: So as investors if you can use that time horizon arbitrage and sort of look a little bit further than the market, you may find some opportunities there.

Calamos: Often, one of the things we did back in 1999, in 2000, we were heavily in tech stocks in 1999, and we had reduced that exposure extremely by mid-2000. We did that because not only were they great companies, but the prices just reflected so much of a bullish tilt. They no longer made sense as price sensitive, but now we are finding quite the opposite situation.

Stipp: Sure. Great companies doesn't always mean great stocks and the opposite can be true as well.