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FUND VIEW-Goldman Sachs likes quality US stocks; top pick J&J

Published 06/22/2009, 09:32 AM
Updated 06/22/2009, 09:56 AM
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* Ideal time for stock-picking -Goldman Asset Management

* Money market assets beginning to flow into equities

* Quality key; focus on strong cash flow, balance sheets

* Johnson & Johnson top pick in U.S. equity portfolio

* Goldman Asset Management bearish on U.S. oil mega caps By Peter Starck

FRANKFURT, June 22 (Reuters) - The divergence in performance between single stocks and the U.S. benchmark S&P 500 index is the biggest in years, creating an ideal stock-picking environment, a Goldman Sachs U.S. equities fund manager said.

"It is a fertile environment for stock picking ... stock picking will triumph," Goldman Sachs Asset Management (GSAM) Client Portfolio Manager Kathryn Koch told reporters in Frankfurt, Germany's financial capital, on Monday.

"This is an ideal moment to take a forward-looking approach and differentiate at the stock level," she said.

GSAM's U.S. equities portfolio marketed in Europe and comprising between 70 and 100 stocks, primarily from the S&P 500 universe, has $140 million in assets under management.

The composition of the portfolio is based on the highest conviction bottom-up ideas of the group's U.S. growth and value equity research teams.

The top-three holdings in the portfolio, which Koch said focuses on what GSAM defines as "quality" stocks with strong free cash flow and strong balance sheets as well as proven management teams, were diversified health products maker Johnson & Johnson, household products maker Procter & Gamble Co and healthcare products maker Baxter International Inc.

The only financial stock in the top-10 was bank JPMorgan Chase & Co. GSAM's approach to picking financial stocks is based on price to tangible book value and on avoiding banks with "unsustainable levels of leverage," Koch said.

In the energy sector, GSAM picks stocks based on enterprise value to proven and probable reserves. According to that metric, favourites are to be found in the mid-cap space rather than among the mega caps, on which Koch said GSAM is "bearish".

HEAVY ON TECHNOLOGY

Technology stocks among the U.S. equities portfolio's top-10 include software makers Microsoft Corp and Oracle Corp as well as network equipment maker Cisco Systems Inc and International Business Machines Corp (IBM).

In the technology sector, GSAM likes companies it expects can grow market share thanks to superior products, and those with sufficient cash on their balance sheets to achieve growth through acquisitions, Koch said.

By end-May, the GSAM U.S. equities portfolio's outperformance versus the S&P 500 was "in excess of 800 basis points," she said. By end-May, the S&P 500 index was up 1.8 percent since end-2008.

"You don't need to take big sector bets versus the broad market to outperform, you can get there by active stock selection," Koch said.

The S&P 500 is up 38 percent from the multi-year low set in early March.

"The market looked very cheap at the nadir in March. It still looks reasonably attractive," Koch said. Overall, the S&P 500 price-to-earnings ratio (P/E) remains below its long-term historical average, she said.

The massive amount of money waiting on the sidelines, mainly in money market funds, after the financial markets mayhem in 2008, was another factor expected by GSAM to underpin stocks.

"In the past four to five weeks we have seen people buy back into the equity markets," Koch said, adding, however, that many investors, from private citizens to pension funds remain underweight equities and within the asset class underweight U.S. stocks. (Editing by Rupert Winchester)

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