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Looking at cost cutters

Monday, August 4, 2008

When the market punches, Tom Ognar punches back.

With prices rising for everything from gold to groceries, real estate values deteriorating and banks struggling to maintain profits as the housing slump continues, many investors are shying away from stocks.

Not Ognar.

"From our standpoint, it's tougher to find universal drivers for growth right now, but there are still companies that can take advantage, especially relative advantage," said Ognar, managing director and senior portfolio manager in Wells Capital Management's Menomonee Falls office, and co-manager of the Wells Fargo Advantage Growth, Advantage Large Cap Growth and Advantage Emerging Growth funds.

Ognar says he and his growth stock team are holding everything from retailers and restaurants that help consumers save a few dollars to high-growth tech companies whose shares have pulled back in this year's market drubbing.

One thing all of these companies have in common, to one degree or another, is that they're benefiting from trends around the world, not just in the United States, he said.

Take Wal-Mart Stores Inc., (WMT), Bentonville, Ark. The retail giant helps consumers save a dollar here and there, which has been evident in its own results, Ognar said.

Wal-Mart isn't the only organization helping consumers save money.

McDonald's Corp. (MCD), Oak Brook, Ill., and Burger King Holdings Inc. (BKC), Miami, both help diners spend $5 or $6 on a meal rather than $12, Ognar said. Both are also nearly 90% franchised, so they're not as burdened by rapidly rising commodity costs.

"They mainly make their profits based on how much revenue the company is doing," Ognar said.

Cognizant Technology Solutions Corp. (CTSH). Teaneck, N.J., is a computer consulting company with most of its operations in India. The company helps customers lower their cost structure by developing complex systems, implementing enterprise software and storing data.

"It's not that the economic environment won't hurt them, we just think it won't hurt them as much," Ognar said. He says Cognizant should be able to boost its revenue by 20% to 30%, yet the stock is trading at a relatively low 17.6 times forward earnings.

Google Inc., (GOOG), Mountain View, Calif., is a very different technology play. The search engine giant's shares are down this year, creating what Ognar calls a good counterpunch opportunity.

Google's revenue grew 43% in the last quarter, paid clicks grew 19%, and the company has pricing power on top of that, Ognar said.

Google has been putting fewer ads on its search pages than competitors such as Microsoft and Yahoo in an effort to make the ads that are there more relevant and targeted, he said. The company has also gotten more disciplined in its hiring, adding the lowest number of employees in a year during the quarter that ended June 30.

Some worry Google's advertising sales will fall during tough economic times. But in past recessions, direct marketing - which Google's search engine-based marketing essentially offers - has held up better.

Google shares saw a lot of trading at lower princes in July because second-quarter earnings came in lower than analysts expected, but revenue and cash flow were strong, Ognar said.

Praxair Inc. (PX), Danbury, Conn., and Air Products and Chemicals Inc. (APD), Allentown, Pa., both supply oxygen, nitrogen, hydrogen and other gases to hospitals, steel-makers and other customers.

These multinational companies have benefited from increased drilling because many non-conventional drillers in areas such as Canada's tar sands use their gases to pressurize reservoirs and force natural gas or crude out of them.

There are also many industrial uses for their gases.

Burlington Northern Santa Fe Corp. (BNI), Fort Worth, Texas and Union Pacific Corp. (UNP), Omaha, Neb., provide rail transportation. Some might figure the flagging economy was depressing railroads, but they're actually doing quite well.

"They've finally gotten religion and realized it's not all about market share," Ognar said. Historically railroads never made their cost of capital, but now they're doing that because they've gotten more efficient and are pricing their services to make better profit margins, he said.

Also, contracts that extended as long as 10 and 20 years are expiring, meaning they are up for renewal. In addition, the railroads are repricing the new contracts at better rates, Ognar said. Rising fuel prices have helped railroads too, especially on longer routes where their fuel efficiency is superior to that of trucks, he said.

St. Jude Medical Inc. (STJ), St. Paul, Minn., makes heart valves, pacemakers and other medical devices for the worldwide cardiovascular market.

St. Jude's strong product portfolio should drive market share increases, and the company is in an industry that should benefit from an aging population for many years to come, Ognar said. Its stock has traded as high as $48.49 and as low as $36.90 in the last 52 weeks.

The biggest risk associated with these shares is the possibility the benefits of implanted heart devices wouldn't hold up for a wide swath of the population, Ognar said.

He holds full positions in St. Jude shares and is still buying for new accounts. They could go as high as $55 in the next 12 to 18 months.