How Top Fund Seeks Growth Stocks Whose Upside Is Underappreciated

VOL. 36, NO. 24

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MUTUAL FUND PROFILE How Top Fund Seeks Growth Stocks Whose Upside Is Underappreciated

year going into Thursday vs. 21.71% for the big-cap bogey and 22.68% for its large-cap growth fund rivals tracked by Morningstar Direct. With such a widely followed growth stock, for example, what have other investors overlooked or underestimated? “Apple has struggled a little bit in terms of their net market share in the market, in part because they are addressing a more affluent buyer,” Crawford said. “But what is underappreciated by the market, we believe, is the way that they monetize each user that is in the Apple ecosystem, through services.” Crawford added, “We’ve always thought that Apple is actually more of a software company than a hardware company. And that’s how people should think of it.” Services now bring in about 20% of Apple’s revenue, she says. And services account for 30% to 40% of earnings. Crawford said, “As they continue to monetize each of their users in the installed base, the earnings stream becomes less dependent on new-hardware cycles and more dependent on penetration of services.” Steadier Than Hardware Crawford and Kelly expect services to prove to be steadier sources of revenues and earnings than hardware. As the broad market comes around to that view, Apple stock should rise, Crawford says. Still, introductions of new

Historically Innovative Era What these fund managers

say they know about Apple that’s special


We live in a promising era for growth stocks. “We are in the early days of one of the most innovative times in history,” said Patrick Kelly, who runs the $559 million Alger Focus Equity Fund ALGRX . The fund’s bets on innovation are reflected in holdings of leading growth stocks like Apple AAPL , Carvana CVNA , Visa V and PayPal Holdings PYPL . Kelly and colleague Ankur Crawford hunt for innovative growth companies undergoing what they call positive dynamic change. “Those companies offer the best investment opportunities,” Kelly said. “One of the reasons why is that (many other investors) often underestimate the change that is occurring.” Kelly and Crawford aim to catch innovations they say are leading us into a futuristic world. Their approach has paid off. The fund is a 2019 IBD Best Mutual Funds Award winner by virtue of outperforming the S&P 500 in 2018 and in the three, five and 10 years ended last Dec. 31. And the fund is aiming for a repeat performance this year. It has gained 23.33% this

business sell used cars online? Carvana does that by offering more data about each car than a buyer could learn by kicking its tires, Kelly says. Also, Carvana aims to provide the ease of mind that buyers seek by offering a seven-day money- back guarantee. And Carvana offers a 100-day or 4,189-mile limited warranty. At the same time, you can sell your old car to Carvana. Still, for many investors, Carvana’s story is more about future promise. As a publicly traded stock, it has yet to post

hardware should also provide a boost. She expects to see that from the introduction of a new 5G iPhone in 2020 or 2021. “So we think they’re kind of underearning right now,” Crawford said. Kelly says services can make Apple hardware less likely to lose users. “The Apple phone has all of (a user’s) apps and so forth,” he said. “So it’s not easy to switch from an Apple phone to another one.” And what about the used- car business of Carvana is innovative? And how does a

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