May 29, 2024

4 Best Investments to Make As Growth Stocks Lead: Top-10% Fund Manager

Like many others, fund manager Jim Golan has made a fortune from mega-cap growth stocks.

For the last 19 years, Golan has logged consistently solid returns as manager of the $2.2 billion William Blair Large Cap Growth Fund (LCGNX). The last decade or so has been especially friendly to Golan and co-manager David Ricci, who joined the fund near the start of 2012.

Large, high-quality growth stocks have been in vogue since the early 2010s, though that doesn’t explain why Golan’s fund has excelled versus its peers. Over the last 10 years, the fund is in the top 10% of its category, according to Morningstar, including five 28% gains since 2017.

The market veteran has been especially bullish on four stocks with weightings of at least 8%: Microsoft (MSFT), Amazon (AMZN), Nvidia (NVDA), and Alphabet (GOOGL). Those companies have dominated in the last five years, carrying the S&P 500 by rising between 79% and 1,672%.

Large-cap growth companies have certainly been the place to be, Golan told Business Insider, and he doesn’t see another sector or group overtaking their spot atop the market anytime soon.

“The improved profitability in terms of margins — free-cash-flow margins — have been dramatic really over the last decade or so,” Golan said in a recent interview. “And when we look out over the next several years, we just don’t see that changing in any meaningful way.”

Why large-cap growth will continue to lead

Several investment firms have sung the praises of smaller stocks in recent weeks, arguing that the cohort has been unfairly punished and is overly discounted from a valuation standpoint.

Golan doesn’t deny that small- and mid-cap companies are cheap relative to large caps, though he thinks the discrepancy is justified. He believes larger stocks won’t just outperform despite higher interest rates — he thinks they may actually extend their leads because of this backdrop.

Conventional wisdom is that elevated interest rates compress stock valuations by reducing the current value of companies’ future earnings, which disproportionately hurts fast-growing firms.

While that may be true, Golan noted that higher rates also make it more difficult to grow since borrowing money is more expensive than in the 2010s, when today’s tech giants rose up.

So, while the market may not reward large-cap growth companies with the earnings multiples they’re accustomed to, higher rates should keep would-be challengers from building goods and services that beat those of entrenched leaders like Alphabet, Amazon, Microsoft, and Nvidia.

“If we’re in a higher-rate environment, these companies have the balance sheets — from a debt-to-capitalization point of view, the free-cash-flow point of view — relative to maybe smaller companies that might be more highly levered,” Golan said.

Golan continued: “That gives us the belief that, in the large-cap space, we should continue to see pretty decent performance as we move forward over the next several years — just given the dominance of these platforms and the scale that these companies have developed over the last decade or so.”

How to invest in large growth stocks — and 4 top picks

To impress Golan, stocks must have scale or other structural advantages that lead to success over his three- to five-year investing horizon. He also likes firms that are expanding profits faster than others in their industry, which itself should be growing more than the broader economy.

From there, the fund manager narrows possible candidates for his portfolio based on each company’s business model, growth potential, earnings and cash flow levels, pricing power, spending on research & development, and, crucially, the quality of its management team.

And while Golan isn’t too concerned about the valuations of large-cap growth stocks relative to unprofitable smaller stocks, he considers how a firm’s earnings multiple stacks up to peers.

“It’s a blend of having confidence in the growth, but also factoring in the valuation,” Golan said.

Most growth companies don’t fit the description Golan is looking for, which is why he only has a few dozen positions at a time. His fund now has 32 holdings, in the middle of its typical range.

Below are four companies the leading fund manager is especially bullish about, along with the ticker, market capitalization, sector, and thesis for each.

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