Jerome Dodson, manager of Parnassus Endeavor fund. (Photo: Picasa)

Jerome Dodson started Parnassus Investments in 1984 and is the lead manager of the Parnassus fund, which has been in the top 17% of Morningstar’s large-company growth category for 15 years. He also runs a concentrated large-cap fund, Parnassus Endeavor, which has 36 holdings. It has been in the top 12% of its category the past decade. All of the Parnassus funds are screened for social criteria, including how a company treats its workers and the environment.

Q: Growth has been out of favor since the technology wreck in 2000. What do you think growth investing offers investors?`

A: Well, it’s growth in an unusual way. I started out as a pure Graham and Dodd guy, but you can’t always buy stocks at bargain-basement prices. If you only look at value ratios, you’re missing out on a lot of opportunities for growth. (Benjamin Graham and David Dodd wrote Securities Analysis. the bible of value investors, including Warren Buffett, CEO of Berkshire Hathaway.)

But we also like to avoid growth stocks at high levels, where the most risk is. We’ve developed a style that combines growth and value. So we look at ratios — price to earnings, price to book, price to cash flow, price to sales — and try to calculate a company’s intrinsic value. If those ratios, taking the average over the past five years, are below those ratios, they’re a candidate for investment. If above, they’re not.

Take one that has done well recently — Whole Foods (WFM ). We’ll focus on the PE. It’s been in the range of 30 to 35 times earnings and then had a big drop-off to 20 times earnings. The reason the stock went down was that growth hadn’t kept up with peoples’ expectations, and the reason why was that there was a lot of competition in the natural foods space. But I don’t think a lot of Whole Foods customers will be going to Walmart (WMT ). We bought the stock in the mid-$30 range, and it has done very well. Even though a PE of 20 sounds high, it’s reasonable compared to where it was. We look for companies with good growth prospects, but don’t pay top dollar for them. We didn’t pay 30 or 35 times earnings for Whole Foods, but it is growth.

Q: Don’t you lose some good investments by looking only at companies that treat employees well?

A: No, I think it helps us. People told us that we’d exclude some good stocks and not do well, but to me, that’s nonsense. How a company treats its employees, in my opinion, is the reason it does well. When you treat employees well, with profit-sharing and benefits, it makes a difference because it gets employees pulling with you and helping you. There’s no way you can completely control employees: You have to trust that she’s going to do more than her job and go out of her way to do things that will help the company. It makes all the difference in the world. Even Walmart is starting to raise wages!

Most of the employees have been here 20 years, with the average well into the high teens. We have very little turnover and so very little retraining. Most people do several jobs, and you can do that if you’re not busy training new employees.

And it’s been easier to find companies that treat employees well. One thing that has really helped is the Forbes list of 100 best places to work. Stocks of those companies have done really well.

Q: What about other social screens, such as the environment? Was avoiding energy stocks a help last year?

A: It did, and so far it has helped us this year. A critic would say that when oil comes off $50 a barrel and energy starts to do well, that will hurt us. But I hope other companies we invest in will offset that.

Q: When people think growth, they think technology. Is that always the case?

A: Well, our No. 1 sector in the Endeavor fund is technology, because there’s a lot of growth there. We have companies like (chipmakers) Applied Materials (AMAT ) and Altera (ALTR ), Google (GOOG ), even old tech Intel and Qualcomm (QCOM ). But we have health care — even some that’s not biotech, such as Perrigo (PRGO ), the largest generic maker of private label. If you go to CVS and pull a generic off the shelf, the chances are that’s made by Perrigo. But we also have biotech, such as Gilead (GILD ). And retailers, like Whole Foods, can can be growth stocks as well.