Morningstar has identified some of the best performing fund managers, all of whom beat their benchmarks both in Y 2019 as well as on a longer-term basis over either a 3-4 or 10 yr frame.
Below are 3 portfolio managers and their best ideas for Y 2020.
Ivy Mid-Cap Growth Fund: Fast-growing mid-cap companies.
2019 return: 37.6%, 3-year average annual return: 20.1%
National Vision Holdings (EYE)
This $1.7-B (sales) optical retailer sells eyeglasses, contact lenses and other products, as well as offering comprehensive eye exams. The company has seen continued growth as it serves an important medical need at good value, according to Ms. Scott. “It’s a compelling story in that it has a unique position as a growth retailer outside of e-commerce,” she points out. As the company brings in more customers and gains market share, comparable store sales have increased. Overall revenue is growing by just over 10%, and the company continues to deleverage,Ms. Scott says. While risks include tariff headwinds and concerns that Walmart may not renew a strategic partnership to operate its Vision Centers, she believes that these are priced into the stock. The company is also starting to leverage its new investments in areas like cybersecurity and laboratories for making eyewear.
CoStar Group (CSGP)
A leading provider of commercial real estate data and marketplace listing services, Washington, DC based CoStar has “high-caliber growth and great cash flow,” according to Ms. Scott. She highlights the company’s founder-led management team and pristine balance sheet with no debt. CoStar’s revenue has been growing at a 20% clip and Scott expects continued innovation in new areas including a recent acquisition of Smith Travel Research, which will allow CoStar to begin expanding into data and analytics for the hospitality sector. The market usually backs off from the stock when the company announces new investment cycles, as it just has, she points out, but while this hurts near-term margins it actually sets CoStar up for its next phase of growth. The company’s expectation is that the business will have $3-B in revenue by the end of Y 2023.
Amana Growth Fund: Low-debt, high-growth large companies; Run according to Islamic principles.
2019 return: 31.7%, 3-year average annual return: 19.9%
Sextant Growth Fund: Low-turnover portfolio of large growth companies.
2019 return: 35.3%, 3-year average annual return: 17.9%
Lowe’s Companies (LOW)
Mr. Klimo calls Lowe’s “a compelling self-help story” that will benefit from a strong housing market next year, supported by low interest rates. Lowe’s new CEO Marvin Ellison has improved operating efficiencies and Klimo highlights new investments in tech, like migrating systems to the cloud and improving online experience, as another boost for the company. What’s more, while “nothing is bulletproof,” and recession and housing market risks are somewhat mitigated by the cost cutting and other internal improvements, which should protect margins, according to Mr. Klimo.
Ally Financial (ALLY)
Financial service firm Ally is in everything from car loans and online banking to mortgages and loans. It is a leader in auto lending, particularly in used car financing: “An area that takes some skill.” he points out that “even if you think about potential disruptions like new car prices increasing, the secondhand market is still attractive.” Ally has good prospects for growth, he says, with the general consensus for the economy looking pretty good and the housing market expected to be solid. The stock has a low PE of under 8X trailing 12 month earnings, a 2.2% dividend yield and earnings are growing at 10% annually. “What’s really remarkable is the valuation that its trading at, despite the fact that the stock is up 37% this year,” he says.
Harding Loevner Global Equity Fund: High-quality growth companies.
2019 return: 28.5%, 5-year average annual return:10.2%
PayPal is a “household name,” but the general opportunity here is the “under penetration of digital transformation in financial services,” according to Mr. Mack. It’s a “long tail opportunity,” especially given that some 85% of the world’s transactions are still settled in cash. What’s different, he points out, is that PayPal is crucially partnering with more financial institutions and increasing its number of merchant accounts. Partnerships with Bank of America and HSBC, for example, have started to pay off as they make PayPal an option in their digital wallet offerings. Mack emphasizes that PayPal’s large user base and the scale of transactions its processes, which are both growing near 20%, is another positive. While the company is up against some other big tech players, like Apple, “there’s room for more than one winner here,” Mr. Mack says.
Vertex Pharmaceuticals (VRTX)
Vertex is a $56-B market cap biotech company focused on drugs to treat cystic fibrosis. Mr. Mack sees it as an overlooked growth opportunity, “it’s overlooked because of its small addressable population of 100,000 our so globally in the scheme of things.” But when thinking about pharmaceuticals and drug pricing, “this is a company that is delivering value,” he says. It has taken an existing set of approved drugs on the market and added a new one: While they can reach about 56% of existing cystic fibrosis, Vertex’s new “triple combination” drug combination to treat the disease will see that number rise to around 90%, according to Mr. Mack. Although the drug is expensive and patients are on them for life, a rising life expectancy and number of treatable cases bode well for Vertex. The company is profitable, with good margins and is growing by over 25%.
A Brief Review of Y 2019
The stock market went on a tear in 2019. Major indexes hit numerous record highs in the second half of the year with the S&P 500 rising more than 29%. This puts it on track to be the best yearly return since at least 2013.
As stocks continued to rise, Wall Street put recession fears on the back burner.
The market has been boosted by the fact that the US economy’s moderate expansions holds steady.
Solid consumer spending, a robust labor market and now an apparent recovery in the housing market have all allayed investor fears.
There has been renewed trade optimism on Wall Street as well, thanks to the signing of several new trade agreements; a revised North American trade agreement and the long-awaited ‘Phase 1’ trade deal with China in the closing months of Y 2019. Going into Y 2020, the market is optimistic that economic growth can continue, especially with diminishing tariff pressures and a Fed on hold.
Have a terrific weekend.
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