THREE weeks after the US Congress barely averted a fiscal cliff of mandatory spending cuts and tax hikes, the Republican-controlled House of Representatives passed a bill to temporarily extend the debt ceiling on Jan 24, pulling the world's largest economy from the brink once again and sending markets even higher. The US stocks barometer Standard & Poor's 500 touched a new all-time high before pulling back. Is it time to take some money off the table or finally time for investors who have been sitting on the sidelines for years to join the party?

For now, the consensus seems to be that global equity markets are headed higher and US stocks are likely to be a key beneficiary.

"US stocks are still trading at a discount to historical valuations despite profit margins being robust and corporate earnings at an all-time high," Grant Bowers, the lead portfolio manager who helps run the Templeton US Growth Opportunities Fund, tells The Edge Singapore in a phone interview from his base in San Mateo, California.

Bowers' Templeton US Growth Opportunities Fund, which has more than US$3 billion ($3.7 billion) in assets, focuses on top-notch growth companies in the US. "From a market standpoint, as much as we are close to an all-time high, the price-to-earnings ratio [PER] for the US market is still just 13 times this year's earnings compared with the long-term average of 14 to 16 times," he says.

A graduate of the University of California, Bowers has been with Templeton for two decades. He started out as a credit analyst, covering municipal bonds, and was senior analyst and team leader covering the telecom, media and technology (TMT) sector during the 1998-2001 bubble years. After the TMT bubble burst, he moved on to become portfolio manager of Franklin Templeton's Global Communications Fund and took over his current role as lead manager of the US Growth Opportunities Fund in late 2008.

To be sure, there is now a strong case to be made for buying US equities as an economic recovery takes hold and margins continue to improve. Bowers concedes that until recently, with investors chasing yields and income, US equities have been a tough place to invest despite many companies in the country having strong corporate balance sheets.

"Many companies in the US emerged from the financial crisis stronger, leaner and more competitive than when they entered the crisis," he notes. "US companies are telling us that while business is not gangbusters, it is very healthy. Demand is improving modestly and there is no wage inflation, and that's showing up in better margins, which are near all-time highs. We believe there is still room for margins to move higher. We are also seeing cash on balance sheets or cash as a percentage of assets at all-time highs for American companies."

The peak in pre-crisis earnings was about US$90 a share in 2007 for the S&P 500. This year, the consensus estimates for the S&P 500 are close to US$113, or 25% higher than the pre-crisis peak.

Manufacturing renaissance

So, where are the drivers of growth for the US market, which isn't too far from its all-time high? For starters, there is the much-talked-about manufacturing renaissance in the US. Companies such as Apple Inc have in recent months talked about bringing home some of their manufacturing from overseas. Bowers says it is not necessarily the higher-profile companies such as Apple but manufacturers in the industrial, chemical and materials sectors that do mundane things in rubber, plastics, machinery and so on — the real building blocks of the economy — that are considering expanding their US manufacturing in a bigger way.

"The driver of this manufacturing renaissance is strong labour productivity in the US at a time when we are seeing wage inflation in China and other emerging markets. That's making the US a very attractive place to manufacture again when you look at parity levels of labour productivity, transport costs and quality differentials."

A key element of the manufacturing renaissance is the falling energy costs in the US, which has abundant reserves of natural gas. Since energy is a big input for a lot of manufacturing, such a structural cost advantage sets the table for companies looking to relocate some manufacturing back to the US, says Bowers. "The manufacturing renaissance isn't just a one-year theme but a one- or two-decade type of theme."

A boom in US manufacturing will be manna from heaven for jobs growth, which in turn will help the beaten-down US consumer who, in the aftermath of the financial crisis, just stopped spending as unemployment levels soared and housing prices collapsed. Worried about their jobs, US consumers began stashing more money away in savings. Moreover, as housing values plunged, US consumers, who have traditionally used mortgage refinancing to periodically take money off the real-estate table in a booming market, were unable to do so, further reining in spending. Now, as employment levels rise and housing values stabilise, US consumers are again spending more.

US consumer confidence is at an all-time high and, more recently, consumer spending has been fairly robust, notes Bowers. The savings rate in the US has recovered nicely since the crisis. Indeed, Bowers says US consumers today are better off than what most people think. "We have seen it in the strong retail sales numbers and in auto sales numbers that are up dramatically."

Recovering housing sector

The other growth driver, he points out, is the recovering housing sector. After five years of house-price declines, prices are stabilising or, indeed in some areas, even inching up. That's clearly helped restored confidence. "Rents are going up and home affordability in the US hasn't been so good in years," observes Bowers. "There is clearly a lot of pent-up demand in the housing sector and banks are again lending for mortgage or refinancing. The mortgage rates being offered are just astounding and refinancing at these levels is creating a lot of positive cash flow for consumers."

A clear sign of the housing uptick can be seen in new housing starts, which came in close to 900,000 annualised on average last month — below the 1.3 million 20-year average or two million from the peak, but way above 200,000 at the height of the crisis. "Housing has a tremendous multiplier affect on the economy," says Bowers.

It's not just housing-related jobs, but also spending and all the related manufacturing and services, appliances and furniture, he notes. "Typically, you see homebuilding picking up, home prices stabilising, and then you see consumer sentiment rising, consumer spending growing and, eventually, corporate profits rising." That leads to a pickup in employment, which in turn has its own virtuous cycle of more spending and more corporate profits. "Since the last financial crisis, it has been frustrating for most Americans that we have not had a straight recovery but more bumpy fits and starts," says Bowers. As recovery takes hold, corporate profits and stocks will do well, he adds.

So, how should investors play this great American recovery story? The way to play growth in the US equity market right now is through MNCs — companies that have strong brands, high-quality products and a strong global presence and are continuing to grow strongly overseas, particularly in emerging markets, says Bowers. "We are overweight in the energy, technology and healthcare sectors, as well as housing and industrial," he notes. His fund is currently underweight consumer staples-driven defensive sectors. "That hurt us last year because the market was very defensive and focused on staples and high-dividend-paying stocks."

Bowers likes MasterCard, which operates a global payment-processing network of credit- and debit-card transactions. MasterCard gets more than half of its revenues from outside the US and is levered to global consumer spending, he notes. The card firm is trading at 24 times trailing earnings and 21 times 12-month forward earnings, he says, while its rival, Visa Inc, is trading at 25 times trailing earnings or 21 times forward earnings. "I will admit these are certainly not the cheapest stocks in the market, but they are not trading at outrageous multiples."

Bowers believes the market is giving the payment transaction players a premium for their consistency of growth. The card companies can continue to grow earnings at 15%-plus for the next five years levered to global trends such as more credit card and ATM usage, he says.

But won't the advent of new near-field communication (NFC) technology in smartphones be a huge disruptor for their business model?

"Actually, MasterCard and Visa don't really run or operate the credit-card business, they just run the networks for bank cards, so the arrival of NFC won't disrupt them," he says. "All you are doing is taking your smartphone and waving it next to a credit-card terminal instead of swiping your card," he says. The payment still runs on a Visa or MasterCard platform. "MasterCard is a tremendous global franchise, with a very high barrier to entry, well-established network, global duopoly with Visa and high-return-on-capital business model that generates a tremendous amount of cash," notes Bowers.

The Templeton fund began investing in MasterCard when the PER was closer to 12 times trailing earnings, he adds. "While we are not adding to our position at these valuations, Mastercard remains one of our largest positions."

One big way to play the US recovery and growth story is through manufacturing and housing. Bowers says his preferred way of playing the housing upturn is through financials such as ­JP Morgan. "It is probably the leading global banking franchise that is levered to increased lending and growth in consumer spending. The US banking industry is still under a lot of regulatory scrutiny, but we are going to see increasing earnings growth this year and next. We think US banks are well capitalised and a lot of the regulatory concerns are already priced in."

Still, he concedes, JP Morgan did have a recent brush with headlines when the stock was dramatically beaten down after it emerged that a rogue trader, dubbed "the London Whale", had made bad bets. "We actually used that opportunity to add to our position," Bowers says. "For a leading global franchise, they lost nearly US$40 billion in market capitalisation on a US$6 billion loss. The market clearly overreacted."

Interestingly, the stock has not only recovered but is now well above the levels it was at before the London Whale issue blew up, which in hindsight appears to be a great buying opportunity.

One of the names Bowers owns that bridges the gap between housing and manufacturing — the two key growth drivers — is Sherwin-Williams, a manufacturer and retailer of paints. "Sherwin-Williams is really the best-managed company in its sector, very well positioned and levered to lower energy prices, which go into the cost of producing paints," notes Bowers.

The stock has had a tremendous run over the past year — up more than 70% — and is trading at 24 times trailing earnings but still has strong earnings growth as well. "This is a stock that could have a lot of growth and multiple expansion as the housing sector recovers," Bowers says. "We believe Sherwin-Williams will grow earnings over 30% this year and over 20% next year," he adds, noting that those are actually conservative estimates. "If we have a better-than-anticipated housing recovery, Sherwin-Williams would do far better than 30% earnings growth."

Another big holding of his is sports-gear maker Nike Inc. "It's a great consumer name," says Bowers. "We think Nike is very well positioned to keep growing globally."

Is there still a way to play shale gas and the new energy boom in the US? "Our preferred way of playing energy is through oil-services stocks, such as Schlumberger, and Cameron International, which is in deepwater drilling, another area of growth," Bowers says. "Schlumberger is the premier global brand in the oil-services space and is in both deepwater as well as onshore."

Apple still a favourite

The biggest single holding in Bowers' portfolio is still Apple, a stock that was once adored, but more recently, has become a victim of high expectations. The Templeton fund first invested in Apple in 2003 at a split-adjusted price of more than US$15. Apple's stock is up more than 33-fold since then. "We have been underweight Apple relative to the benchmark since early last year," says Bowen. "But we still think it's a great company and not an expensive stock."

Yet, he notes, despite being the world's largest and most profitable company, expectations for Apple continue to be very high. "The bigger they grow, the harder it becomes to continue growing and delivering on profitability, margins as well as new products, the way they have in the past. But Apple was a bargain then and it is still a bargain. Relatively, it is less of a bargain now, but we still own and like it."

Bowers is also a big Google fan. He believes the company is incredibly well positioned as the premier Internet search and advertising player. "I like Google for its core search business and its fast-growing Android mobile platform," he says. "The great thing about Google is that it's not an expensive stock."

The stock is trading at 16 times 12-month forward earnings or 20 times trailing earnings. For most of last year, he notes, Google traded at a discount to the market. "We think Google is a stock that will do very well over the next three years, with 15% earnings growth annually."

Bowers doesn't think Facebook's new search forays are going to hurt Google. "Facebook's 'social search' is a different mechanism that is focused on search internally rather than externally," he says. "I don't believe we will see any real erosion of Google's franchise." According to him, Facebook could come up with a search product, but it would be very expensive to develop a search platform rivalling Google and keeping up with it.

The fund also owns the online retailer Amazon.­com. Unlike highly profitable Apple and Google, Amazon doesn't make much money and trades at ridiculous valuations akin to pie-in-the sky dotcoms at the height of the tech bubble. "Amazon is the largest online retailer in the world and continues to take share from traditional retailers," Bowers notes. "It is investing for growth by building more distribution centres" to facilitate same- or next-day delivery of products across North America, he says.

But what about those lofty valuations? "Amazon is one of those stocks that have always looked very expensive and you have to think about it as a long-term holding and look at its future earnings power," says Bowers. "Its cloud services business has been tremendous. It is entering new higher-margin businesses and making itself incredibly invaluable, not just to consumers but also to enterprises."

Bowers also likes Qualcomm, which makes chips for smartphones and tablets. "They are extremely well positioned at the centre of this boom in mobile data," he notes. "Qualcomm has a great business model and they don't care whether it is Samsung or Apple which makes the phone, because they get royalty on the number of chips sold." Another name in the mobile-telephony space that the Templeton US Growth Opportunities Fund owns is SBA Communications, a company that owns and operates cellular towers. "It's a great business model with high recurring revenues," says Bowers.

The Templeton fund manager also likes the biotech and medical technology sectors. "We like the innovation that is taking place in healthcare, with companies creating new drugs that extend people's lives or help them treat and live with their illnesses and ultimately lower the costs to the healthcare system," Bowers says.

One of his big holdings in the sector is Gilead Sciences Inc, which was one of the best-performing stocks for him last year, with a return of more than 60%. "Gilead has the world's best HIV drug and it has some very promising data coming out on a Hepatitis C drug that could do very well," he notes. Gilead is growing earnings at 20%-plus and Bowers believes they could really accelerate. "The stock is trading at 17 times 12-month forward earnings, he says. "They are in biotech, so there is always going to be the unforeseen, but of all the biotech stocks we have looked at, Gilead looked the most promising to us."

This story first appeared in The Edge Singapore weekly edition of Jan 28-Feb 3, 2013.