Better Know a Stock Picker

Welcome, Fools, to part 30 of our several-thousand-part series, "Better Know a Stock Picker," which is loosely, but not too loosely, based on Stephen Colbert's "Better Know a District" from The Colbert Report.

Like Stephen and his thorough investigations into America's congressional districts, I take a look each week at a fund you may want to own. What's on tap this week?

T. Rowe Price Growth Stock (PRGFX)

Expense Ratio

0.72%

Fund Size

$18.3 billion in assets

1-Year Return

12.60%

5-Year Return

6.35%

10-Year Return

8.98%

Sources: T. Rowe Price, Morningstar.

Top 5 Holdings

Company

% of Assets

General Electric (NYSE: GE  )

4.10%

UnitedHealth Group (NYSE: UNH  )

2.44%

UBS (NYSE: UBS  )

2.18%

Schlumberger (NYSE: SLB  )

1.90%

Wal-Mart (NYSE: WMT  )

1.79%

Source: Morningstar.

Meet Bob Smith
The fightin' team at T. Rowe Price Growth Stock is led by Bob Smith, who took over in 1997 and hasn't looked back. Through August, Growth Stock under Smith's nine-year tenure had returned more than 114%, easily crushing the market over the same period. Eat that, Wall Street.

But more superstantial days could be ahead. Smith, who favors large-cap stocks that are growing faster than the market, recently told USA Today that his favorite stocks have rarely looked as cheap as they do now. "You can have modest earnings growth for those companies, modest P/E expansion, and that should give you 10% to 15% returns," Smith said.

"Modest" is the key word in that phrase. Unlike other go-go-growth managers, Smith's primary concern is avoiding risk. That's why he told Kiplinger's in 2004 that he won't buy stocks with super-high P/E ratios. Nor will he submit Growth Stock investors to the Wall Street hamster wheel; portfolio turnover averages just 36%, well below the category norm of 94%.

How he invests
Smith would rather back up the truck on his best ideas. Just recently, he added new money to four of his top five positions.

But he's also willing to rebel when he sees an opportunity for outsized gains. Consider Google (Nasdaq: GOOG  ) . Big Goo is a top 25 holding for Growth Stock to which Smith recently added new money. Is he crazy? Maybe. A trailing P/E of 59 doesn't sound promising.

Yet Google fits all of Smith's stated investing criteria from a recent Q&A at troweprice.com. His list: firms participating in fertile fields of growth, run by excellent managers, and which sustain growth through organic cash flow. Sounds like Google to me.

What's more, Capital IQ places Big Goo's 2007 P/E at 33, slightly under the search king's 35% long-term projected growth rate. That's particularly intriguing in that the Street's investapo have consistently underestimated Google's growth.

Is this fund for you?
Could Smith be the next Peter Lynch? Not likely. Fidelity Magellan under Lynch produced 29% average annual returns for more than a decade. Smith isn't likely to ever attain that sort of record. Fortunately, he doesn't have to. Growth Stock is designed to modestly beat the market without causing worrywart value huggers to panic.

Then there's the cheap factor. Growth Stock's 0.72% expense ratio is less than half of the category average. Market-beating performance, below-market prices -- that's a recipe that fund investors should love. Or so says Shannon Zimmerman, who leads our Motley Fool Champion Funds service. Shannon picked Growth Stock for the inaugural issue in March of 2004, and the fund is up on its benchmark by more than 6% since. (It's also one of several winners for Shannon; click here to get 30 days of free access to the entire portfolio.)

And that's today's profile. See you back here next time, fund nation. Good night.

For more Foolish coverage of growth gurus:

UnitedHealth is a recommendation of the Fool's Inside Valueand Stock Advisor services. Wal-Mart is an Inside Value pick.

Think you can't beat the market with funds? Think again! The selections in Shannon Zimmerman's Motley Fool Champion Funds portfolio are up an average of 27%, versus just 18% for their comparable benchmarks. Ask us for an all-access pass to get an unfettered look at all of Shannon's picks, manager interviews, and model portfolios. Go ahead; it's free for 30 days, and there's no obligation to buy.

Fool contributor Tim Beyers, ranked 1,336 out of 18,179 in Motley Fool CAPS, is a regular viewer of The Colbert Report. (Stay the course.) Tim didn't own shares in any of the stocks or funds mentioned in this article at the time of publication. Get the skinny on all of the stocks in Tim's portfolio by checking his Fool profile. Wal-Mart is an Inside Valuerecommendation. The Motley Fool's disclosure policy is always championship-caliber.


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