Additional top stocks like Netflix (NFLX), Lululemon Athletica (LULU) and Amazon.com (AMZN) are also big reasons why the fund is in a groove, outperforming the broad market as well as its large-cap growth peers tracked by Morningstar Inc. over short, intermediate and long periods, ranging from year-to-date to one, three, five and 10 years.
So far this year, going into Wednesday, the fund was up 8.22% vs. 5.27% for its direct rivals and 1.79% for the big-cap bogey. Netflix was up 75% this year. Adobe advanced 32%. Amazon was up 29%. Lululemon had gained 20%, while Zoetis climbed 19%. Netflix, Lululemon and Amazon happen to be members of Leaderboard — IBD’s premium service that spotlights play-by-play moves of top stocks.
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Paul Gordon, who manages the fund along with Eric Fischman and Matthew Sabel, says the fund uses a classic investment strategy. “The underlying philosophy is that over time stocks follow earnings and cash,” he said. “We look for companies that grow earnings and cash flow above market-average rates across economic cycles. We look for companies with strong competitive positions in growing industries that have pricing power, good management teams and quality characteristics such as recurring revenue, low capital intensity and attractive balance sheets.”
And the fund is patient. “We have a long investment time horizon, which you see in our low (annual) turnover,” he said.
The fund has not changed its approach during the recent market volatility. But the fund added to some names on price dips. “Volatility in the market sometimes provides an opportunity to collectively add to secular growth companies that we like,” Gordon said.
Traits Of Leading Stocks Like Netflix
Netflix’s earnings per share grew at a triple-digit pace in four of the past six quarters.
As IBD reported Tuesday, Netflix stock gapped up that morning after it crushed expectations for new subscriber growth in the first quarter and guided higher than views for the current quarter.
The streaming service’s push into original programming is a key strategy.
“Netflix has about 120 million subscribers around the world,” Gordon said. “They’ve had success ramping up subscribers. The real excitement (generated by their) January (earnings) call was the lack of (departures by customers) following their price increases, which proves the market’s confidence in their long-term pricing power.”
Yoga Apparel Seller Is No Lemon
Lululemon’s share price has uptrended for nearly a year, reversing an approximately yearlong downtrend. “The issue that Lululemon faced was that it grew very rapidly for a number of years,” Gordon said. “They took several years to reinvest in the company, which hurt profitability. Now they seem to be coming out the other side.”
Gordon added, “As revenues continue to increase and costs increase at a slower pace, it benefits their earnings growth.”
The fund trimmed modestly in recent disclosures. Gordon describes the trims as “just selectively trimming some into (share price) strength.”
Amazon, Gordon says, is firing on all cylinders. “Its e-commerce business continues to take significant incremental share of every retail dollar that’s spent,” he said.
He calls Amazon Web Services the No. 1 player in its space. “To drive down costs to customers and invest in new services, a web services provider needs scale,” he added. “Amazon has that scale.” Also, it continues to post significant revenue growth, he says.
The segment of Amazon’s e-commerce business that involves third parties selling through Amazon — its so-called 3P business — has higher-margin growth than its 1P business, sales of inventory owned by Amazon itself, Gordon says.
Adobe’s Strategic Shift
Adobe’s share price barely slipped during the recent market volatility. Adobe owes its resilience to its leadership status and to its switch to subscription revenue from sales of packaged software. “Adobe has very strong competitive positions in growing markets,” Gordon said. “And it continues to experience the benefits of moving to a subscription-based business model.”
Zoetis Has Steady Growth
The MFS team likes both faces of Zoetis’ business. Its farm-animal medicine business is steady because farmers can’t afford to lose livestock. Its pet-medicine business thrives on sentimentality. “The company calls it the humanization of pets,” Gordon said. “In the 1950s your dog slept in a doghouse. Now the dog sleeps on the bed with you.”
Gordon added, “Zoetis is the largest competitor in animal health, an industry growing in the mid-single digits with fewer risks than human health, given that there is no third-party payer risk.”
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