22 Oct 2010 Sound Shore - Q3 2010 Commentary ( Portfolio )
After slogging through the dog days of summer, stocks advanced broadly in September lifting the third quarter to solid gains. Better than expected global economic signals and reasonable equity valuations more than offset investor concerns about the rotating devaluation of “old guard” currencies.

Although the health care sector underperformed the market during the quarter, two of our best contributors were drug makers Genzyme and Pfizer. Bio-pharma developer Genzyme’s gain of 39% followed Sanofi-Aventis’ announced interest in acquiring the company, while Pfizer was up 20% following better than expected earnings driven by cost control. Similarly, asset manager Invesco gained 26%, outperforming the lagging financial sector as its net funds flow topped both forecasts and peer group results due to improved product performance. Other outstanding contributors included AES, Coca Cola, eBay, and Texas Instruments.

Bank of America was the biggest detractor for the third quarter, down 9%, due to concerns over new financial regulations. We believe Bank of America, trading at tangible book, should continue to consolidate its market share gains and reclaim double-digit returns on equity. Applied Materials, which declined 3%, was also one of the poorest performers. Applied Materials, a leading technology supplier to the global semiconductor industry, is selling at the low end of its historic price to sales ratio and 10 times estimated earnings despite better than estimated market earnings growth through 2012 and a dividend yield of 2.4%.