The universe of stocks in the U.S. consists of thousands of names. But Noah Blackstein, manager of the $229.6-million Dynamic Power American Growth Fund, is extremely picky. He owns only about 20 companies, each usually representing 4% of fund assets, although he may go as high as 10%.

Moreover, as an avowed growth investor, he is very particular about each stock’s characteristics. While the stock-picking process is initially driven by quantitative analysis involving screening several databases for attractive companies, Blackstein zeroes in on specific factors.

“I’m looking for revenue and earnings growth numbers — high teens or better,” says Blackstein, 37, vice president of Toronto-based Goodman & Co. Investment Counsel Ltd. , part of DundeeWealth Inc. “There are not that many companies that can grow at that rate. And even fewer can sustain that type of growth. The main question I ask is: ‘Can this company be significantly larger in terms of revenue and earnings in three to five years?’”

In essence, Blackstein is looking for growth stocks that are less affected by the economy’s ups and downs and that benefit from secular growth trends. He ferrets out companies that have an innovative product or service or that are in expanding industries because of changes in the marketplace.

Consider Google Inc., the Internet search engine that has emerged as the player to watch in the advertising world. “It’s a secular growth story in terms of where advertising dollars are being spent,” he says, “and reflects the move from traditional media to the Internet. Google is the dominant force in terms of online advertising.”

Blackstein bought the stock on the IPO in August 2004, when it was at US$85 a share. Back then, Internet advertising accounted for about 2% of the US$1-trillion global advertising market. But the 18-34 age group in North America was spending more time online and less with traditional media such as television and newspapers. “A whole generation has been lost to advertisers [on TV],” he noted at the time. “The younger market is spending 20% of its time online. If Internet advertising was in proportion to the amount of time people spent, Google has an enormous potential market.”

Today, Internet advertising has grown to 5% of the global market. And Google’s earnings have been much better than expected, says Blackstein. Its annual revenue has grown to almost US$12 billion from US$10 million in 2000.

In assessing a stock, Blackstein gives top marks to good management. “Why has Google been so successful and Yahoo! a disaster? Management. You had the secular growth and the opportunity. But you also had a management team at Google that saw that opportunity and executed well. That’s critical.”

Google was recently trading at US$708 a share. Based on estimated 2009 earnings of US$30 a share, that is a price/earnings multiple of 23. Blackstein does not have a target for the stock, although he says there is “significant” upside. He argues that Google was inexpensive from the start. “People said it’s one of those silly dot-coms, but in retrospect it was a cheap stock,” he says. The IPO was trading at four times 2007 earnings (estimated at US$20 a share). “All my companies, hopefully in retrospect, look cheap,” he adds.

Blackstein may be self-confident and brash, but the performance numbers speak for themselves. The fund returned 36% for the 12 months ended Oct. 31, vs a 3.8% loss for the median fund in the U.S. equity category. For the three years ended Oct. 31, the fund had an average annual compound return of 18.9%, vs 2.6% for the median fund, and for five years, averaged 14.1% annually, vs 1.2% for median. Significantly, these numbers were achieved in the face of a very strong Canadian dollar and without any currency hedge. (The $38.3-million Dynamic Power American Currency Neutral version of the fund eliminates currency risk.)

Blackstein has managed the fund since its July 1998 inception. Last month, it earned some hefty accolades when the fund won top honours in the U.S. equity fund category at the 2007 Canadian Investment Awards. Morningstar Canada and Globefund have both given the fund a five-star rating.

When it comes to investment style, Blackstein shuns labels. Instead, he likes to refer to his investment bible, the 1962 investment classic, Common Stocks and Uncommon Profits, by Philip A. Fisher. Fisher is to growth investors what Benjamin Graham is to value investors. After a lifetime spent as an investment counsellor in San Francisco, Fisher died in March 2004 at the age of 96. He was famous for buying technology stocks when they were unrecognized and was noted for buying Motorola Corp. in 1955 and never selling it.

@page_break@Blackstein admits that Ben Graham’s value investing philosophy did not resonate with him. But then he heard Warren Buffett once say that he (Buffett) identified 25% of the time with Graham and 75% with Fisher. That sparked Blackstein’s interest.

“You can’t be a successful growth manager without reading Fisher’s book,” says Blackstein, who admits that his evolution into a growth investor was a gradual process. “We still ask some of the basic questions that Fisher asked. Among the 15 questions that he raises, the key one is: ‘Does the company have the products and services to deliver long-term growth?’”

This brings to mind Blackstein’s own investment in Apple Inc., the fund’s largest holding at 10%. “The iPod transformed the company, and a lot of other companies would have rested on their laurels. But management continued to innovate and created the iPhone, which has the potential to be significantly more successful.”

A holding for more than five years, the stock recently traded at US$189.50 a share, more than double its price at the start of 2007.

Fisher also advised investors to look at a company’s investment in research and development, and determine the management team’s ability to plan for the future and develop new products to replace existing products once they have had their run. “The companies and the opportunities for growth have changed since Fisher began in the 1950s,” Blackstein says. “But the questions haven’t changed.”

Blackstein does share one thing with Buffett: he owns concentrated positions. But while Buffett is famed for his buy-and-hold style, Blackstein is an extremely active trader. Indeed, turnover was a staggering 821.6% in the year ended June 30, 2007, and 742.1% in the same period a year earlier. Blackstein, who frequently takes profits, admits that he trades heavily around core positions.

At the same time, Blackstein prefers to maintain a narrow focus on a select group of growth stocks, especially in what he calls the “post-Bubble” environment.

“If you look at Apple or Research in Motion Ltd. or even eBay Inc., they more than doubled their 2000 share price peaks. Why? Because they delivered on the growth,” he says. “I don’t believe that there are 60 great growth stocks out there. It’s a small group of companies that [are attractive]. Being concentrated in 20 or so names is the way I like to approach it.”

A Toronto native, Blackstein graduated in 1992 with a bachelor of arts in economics and political science from University of Toronto. He spent the summer of 1992 in London attending a course in international portfolio management at the London School of Economics. On his return, Blackstein landed an entry-level job at BPI Capital Management Corp. in Toronto. Within a year, he was an equity analyst and worked on the foreign content of several Canadian equity funds.

In 1997, when BPI set up a global equity management arm in Orlando, Fla., Blackstein helped with the transition. “I had to decide if I wanted to spend the rest of my life in Orlando.” He thought otherwise and accepted an offer from Goodman & Co., which launched the Power group of funds in 1998. Next summer, he will have been there a decade.

“It’s been an interesting market,” he says. “The tech bubble, the terrible bear market and the rise of the C$, which has wiped out many of the gains for Canadian investors.”

Still, Blackstein is always on the hunt for secular growth opportunities and has lately focused on alternative energy firms. There have not been too many opportunities in the U.S., he says, and he has picked a number of European alternative energy companies for the $134-million Dynamic Power Global Growth Class, which he has run since January 2001. But Phoenix, Ariz.-based First Solar Inc. has been an exception and is a big winner for the American fund.

Blackstein bought First Solar for Dynamic Power American because of its so-called “think film” technology, which is far cheaper than conventional poly-silicon technology and more efficient. “It’s very close to grid parity. That means on a per-kilowatt cost basis, it’s starting to be competitive with coal or natural gas technology,” says Blackstein. “By 2010, it will be at grid parity. Alternative energy is a huge opportunity.”

He paid around US$20 a share shortly after its IPO in late 2006; the stock recently traded at US$220 a share. Based on estimated earnings per share of US$2 in 2006, Blackstein argues that the IPO traded at nine times earnings. But with the huge run-up, it is now trading at around 50 times 2009 earnings, based on earnings forecasts of US$4.50-$5 a share in 2009. “If it earns US$5, it’s an expensive stock,” says Blackstein.

He maintains, however, that First Solar has a habit of beating analysts’ estimates. “If the secular growth and opportunity is there, “ he says, “the management has to execute. If you look at the installations and operating leverage, there is a lot of room for growth.”

Although the fund is highly rated by some analysts, they caution that it’s highly volatile and suitable only for aggressive investors. “You have to give credit to his stock-picking ability,” says Gordon Pape, Toronto-based publisher of Internet Wealth Builder. “He has shown that he’s very good at choosing winners.”

But advisors and clients have to understand that Blackstein’s investment style and insistence on taking large positions cuts both ways. Volatility is high and the fund has a history of big wins and big losses, says Pape: “If he chooses right, it will dramatically improve performance. If he’s wrong, it will drag the performance right down.”

The fund lost 44% of its value in the 12 months ended Sept. 30, 2001, which coincided with the market collapse after Sept. 11 and the bursting of the tech bubble.

And there is additional risk in that currently more than half the assets are in the information technology sector, he says.

Although Pape gives the fund a top rating, he considers it more suitable for non-RRSP portfolios: “If the fund takes a hit and you sell, you can declare a capital loss. This fund is for investors who have a higher risk tolerance and understand that it is an aggressively managed fund.”

Ranga Chand echoes that view. “For the vast majority of investors, the fund is too volatile,” says Chand, analyst and president of Ottawa-based Chand Carmichael & Co. Ltd. In an analysis of rolling returns, Chand concludes that investors should adopt a buy-and-hold approach.

“Even in rolling five-year periods, 52% of the time over any five-year period it has lost money,” says Chand. “But based on eight-year rolling periods, the fund has delivered positive returns. Anything shorter than that and you are taking a risk.” IE