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 U.S. 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 one trade deal with China—in the closing months of 2019. Going into 2020, the market is optimistic that economic growth can continue, especially with diminishing tariff pressures and a Federal Reserve on hold.
We queried Morningstar to identify some of the best performing fund managers, all who beat their benchmarks both in 2019 as well as on a longer-term basis over either a three year, five year or ten year period. Below are the portfolio managers and their best ideas for the coming year.
Needham Small-Cap Growth Fund: A blend of growth and value small companies.
YTD: 53.5%, 5-year return: 14.7%
II-VI Inc. (IIVI)
Saxonburg, PA-based II-VI is a global manufacturer of high performance, high tech specialty materials that go into a whole host of different industries and end markets, from consumer and communications to aerospace and defense. “It’s a broad economic play to the end markets that utilize their technologies,” says Retzler, who highlights the “stellar management team” and its recent acquisition of optical communications manufacturer, Finisar. While topline growth has been in the double-digits, that will accelerate thanks to cost savings and revenue synergies from integrating Finisar. While $1.4 billion (revs) II-VI has exposure to trade relations with China, which weighed on the stock’s performance in the last few years, a thawing in those relations will brighten its outlook. Retzler expects growth to generate free cash that will ultimately “provide the opportunity to de-lever the balance sheet.”
Navigator Holdings (NVGS)
Reitzler calls $303 million (revs) Navigator Holdings, an energy shipping business that delivers liquid propane gas (LPG), “a play on resurgence in global economic growth.” He expects it to be a beneficiary of thawing trade tensions and subsequent increased commodity sales: “If you see a recovery in emerging markets, which we think will begin to happen globally, LPG is key to energy usage in a great part of the world.” While Navigator Holdings has been under pressure for the last four years, investments the company has made in infrastructure and partnerships should begin to payout, Reitzler predicts, adding that the company has also expanded to new terminals that will allow it to export more products globally. Another catalyst is the “continued production of sizable energy byproducts within the U.S. that will need to be delivered to global markets.” As a heavy shipping company, there is debt on the business—but it’s manageable, says Reitzler.
Baron Growth Fund: Small-cap U.S. growth companies
YTD: 40.7%, 3-year return: 19.8%
Vail Resorts (MTN)
This operator of world class mountain and ski resorts is divided into separate divisions for its resorts, hospitality and real estate. The company has seen continued growth in full season pass sales, as well as early benefits from its mid-2019 acquisition of Peak Resorts, which helped integrate millions more people into its network. Rosenberg expects good earnings growth with robust free cash flow going forward. This could lead to opportunistic mergers, debt reduction and dividend growth. Vail, which had $2.0 billion in revenues in fiscal 2019, is very digitally focused and is increasing the number of skiers on season or day passes, using more data to do enhanced targeted marketing, and increasing the skier experience to enable continued same store pricing increases.
CoStar Group (CSGP)
CoStar, is a $1.2 billion (revs) provider of info analytics and online marketing services for commercial and multifamily real estate offices. Rosenberg expects organic revenue growth to accelerate toward 20% in 2020 and beyond, as the company continues to significantly expand its salesforce and enter new markets—selling to owners and investors rather than just brokers and property managers. Growth will also come from its Apartments.com division, which matches renters with landlords. CoStar is also expanding internationally, moving beyond the U.S. and Canada to places like Western Europe. The company also has a pristine balance sheet and a huge amount of free cash flow.
Driehaus Small-Cap Growth Fund: Fast-growing small companies.
YTD: 40.4%, Since inception (2017): 26%
This cloud software company works with corporations, governments and their agencies to provide tools for mass notifications and population alerts. Its software helps alert employees or citizens of whatever is happening—from natural disasters to cyberattacks. According to James the $147 million (revs) company, which has yet to turn a profit, is growing at 30% per year, and is increasingly winning contracts with big companies and the Federal government. “It’s the next generation amber alert,” he describes. While Amber alerts, for example, are a homegrown custom government solution, Everbridge is far more sophisticated in its software, James says, since they are able to use various technologies—like location services—to notify people in a specific geographic area. He also highlights that the European Union’s mandate to select a mass notification system for all their member countries—where several have picked Everbridge thus far.
This $3.5 billion market cap clinical stage biotech company focuses on precision medicine targeting genetic cardiovascular disease—the number one cause of death in the world. “Virtually all drugs that treat this do so indirectly by lowering cholesterol or treating symptoms,” James describes, “but MyoKardia is one of the first to target the source of the disease—the underlying genetic defects of the cardiac function.” One disease it’s targeting, for instance, is Hypertrophic cardiomyopathy (widening of heart valves). Going into next year, James highlights a phase three study that is expected to read out well, as the previous phases have. “For a biotech company of this size and this pipeline, its balance sheet is quite strong,” he says ( Myokardia has no revenues or profits yet). “That should be sufficient for the company to fund studies and develop its pipeline for the foreseeable future.”
Zevenbergen Growth Fund: Large-cap consumer and tech companies.
YTD return: 38.4%, 3-year return: 24.3%
Exact Sciences (EXAS)
Madison, Wisconsin’s Exact Science’s core product, Cologuard, has seen “strong organic growth” thanks to an 80% increase in revenue this year—and is expected to hit that again next year, according to Dennison. Cologuard allows for at-home stool screening as an alternative to getting a colonoscopy. Company’s partnership with Pfizer—a co-promotional sales agreement—has been beneficial, since it helps give Exact Sciences access to the pharma giant’s salespeople, marketing expertise, and relationships. Exact Sciences has continued to grow its network of doctors, adding new primary care and GI specialists. Dennison says there’s much to look forward to next year: The company plans to test Cologuard 2.0—a more accurate and economical version of its signature product—and is reportedly planning on coming out with a diagnostic for liver cancer. “It’s making the right investments to drive growth for the next decade,” says Dennison. “The competitive chatter has been misunderstood and weighed on the stock, but we think that could clear up.”
A market leader in online home furnishings, Wayfair has been popular among young consumers as they move out and buy homes. He emphasizes that the company has revenue growth in the mid-20% range, though losses are higher since its still in investment mode—but profitability is expected in the next five years. Wayfair is further boosted by international investments, primarily in Western Europe, “where they’re following the same playbook that’s been successful domestically,” according to Dennison. Competition comes from brick-and-mortar players and larger players like Amazon, he says.
Federated Kaufmann Large Cap Fund: Large cap growth companies.
YTD: 37.7%, 10-year return: 14.9%
Vulcan Materials (VMC)
DeNichilo likes this $4.8 billion (revs) materials company, the largest producer of construction aggregates in the U.S., because it is entering “an exciting period of both increasing volume and pricing.” The business is growing thanks to a strong focus on infrastructure spending at the state level—driven by increased gas taxes, says DeNichilos. What’s more, “solid federal support” for infrastructure on both sides of the aisle on Capitol Hill will be an added boost going into next year.
This 149-year old company is a leading producer of heating, ventilation and air conditioning (HVAC) equipment globally. It will spin off its more cyclical compressor business to Gardner Denver in the first quarter of 2020. That would leave $16 billion (revs) Ingersoll-Rand as a “pure play HVAC company,” not to mention one with high market share, powerful recurring revenue—from installing, replacing and servicing parts, strong pricing power and “a balance sheet prepared to participate in further HVAC industry consolidation.”
Ivy Mid-Cap Growth Fund: Fast-growing mid-cap companies.
YTD return: 37.6%, 3-year return: 20.1%
National Vision Holdings (EYE)
This $1.7 billion (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 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, 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 lab research for making new 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 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 billion in revenue by the end of 2023.
Amana Growth Fund: Low-debt, high-growth large companies; Run according to Islamic principles.
YTD: 31.7%, 3-year return: 19.9%
Sextant Growth Fund: Low-turnover portfolio of large growth companies.
YTD: 35.3%, 3-year return: 17.9%
Lowe’s Companies (LOW)
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 Klimo.
Ally Financial (ALLY)
Financial service firm Ally dabbles 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.” Klimo points out that “even if you think about potential disruptions like new car prices increasing, the second hand 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 8 time trailing 12 month earnings, a 2.2% dividend yield and earnings are growing at 10% annually. Says Klimo, “What’s really remarkable is the valuation that its trading at, despite the fact that the stock is up 37% this year.”
Baillie Gifford U.S. Equity Growth Fund: Concentrated portfolio of growth companies.
YTD Return: 29.4%, Since inception (2017): 20.7%
New York City’s Yext is a small cap technology company that allows businesses to use its cloud-based network of search engines, maps and other software to boost awareness and build their brand. As more companies integrate digital components into their business strategies, Yext gives them the tools to do so, as well as share information with publishers in a way that becomes accessible to end users. Yext Answers, which is aimed at streamlining consumer questions about different companies or products. “While Yext is still a loss making business—and path to profitability has become the buzzword in the aftermath of WeWork—we’re happy to tolerate that if we can see the trajectory of growth going forward,” according to Slater. “We see them having a really big addressable market in the long term.”
This fintech company operates an electronic trading platform for institutional credit markets, bringing digital tools to bond trading. “What’s interesting here is that we’ve seen equity markets move to digital trading, but that’s been a much harder problem to solve for bonds—as they’re generally much less liquid” describes Slater. Digitizing these markets is a big win for asset owners because it takes out the cost aspect of intermediation that’s associated with traditional bond trading. MarketAxess has topline growth of at least 15% going into next year, accompanied by very high margins of around 50%, both of which are likely to grow in the future, Slater forecasts.
Chase Sheridan and Greg Steinmetz
Sequoia Fund: Run by RCG investment committee since 2016; Focus on undervalued companies.
YTD return: 29.3%, 10-year return: 11.5%
Credit Acceptance Corp (CATX)
Credit Acceptance Corp. is a subprime auto loan lender that the Sequoia fund likes to think of as “the best house in a tough neighborhood.” The company is counter-cyclical, as it doubled its profits during the financial crisis according Sheridan and Steinmetz. They emphasize that Credit Acceptance doesn’t face the same set of risks as a typical subprime lender, thanks to a “portfolio program” with its dealers where it shares both the costs and payouts of loan underwriting. That means that in a downturn, Credit Acceptance will suffer less than its peers, and it can use those periods of stress to gain more market share. The company has been growing—earnings were up 22% in 2019—and it has room to continue to do so without M&A. While some bad actors in the car loan industry prey on the working poor, “Credit Acceptance Corp plays by the rules and plays fairly,” Sheridan and Steinmetz describe. “They have excellent computer systems that keep their collection agents within the bounds of what the government allows them to do.”
“Sometimes a good idea is right in front of your nose,” says Sheridan and Steinmetz. “Alphabet’s balance sheet ( with $130 billion in cash) is like Fort Knox, and the resilience and quality of the business is extraordinary.”The company has averaged near 20% growth, and its “search revenue is driven by mobile and Youtube in terms of its fastest growing segments.” With $25 billion spent on research and development per year—second in the world behind Amazon—”that’s basically Dell Labs and Xerox Park on steroids,” according to Sheridan and Steinmetz. “Google’s competitive strengths are nearly insurmountable in its core business of advertising,” they point out. The tech giant also has ambitions to move up the ladder in the burgeoning business of cloud computing, where it currently ranks behind Amazon and Microsoft.
Harding Loevner Global Equity Fund: High-quality growth companies.
YTD: 28.5%, 5-year 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 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,” Mack says.
Vertex Pharmaceuticals (VRTX)
Vertex is a $56 billion market cap biotech company focused on drugs to treat cystic fibrosis. 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 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%.