Talk about a tricky balancing act. That’s what MFS Mid Cap Growth Fund (OTCIX) performs.
The market has gone up and down like a kid on a trampoline for the past six months. Yet the $2.1 billion mutual fund’s marching orders are to find companies that have the best opportunities for growth two to three years in the future and whose valuations underplay those growth prospects.
So how does the mutual fund pursue those goals without getting crushed in the market’s volatility in the meantime?
“The benefit of a longer-term time horizon is that you can look through the market’s short-term noise,” said co-manager Paul Gordon, who runs the fund with colleagues Eric Fischman and Matthew Sabel. “We also tend to look for companies that are heavily in control of their own fate, so events in the world shouldn’t disproportionately impact them. They can grow through those issues.”
It’s not that the fund is looking for stocks that play dead for two or three years, Gordon says. What the fund wants is stocks whose earnings keep on growing for at least two or three years more. “We’re willing to trade a stock with a high current rate of growth for one where we can be confident in the duration of its (slightly slower) growth,” Gordon said.
That approach has enabled the fund to keep its footing during the market’s gyrations. Going into Friday, the fund was up 6.23% so far this year, topping 72% of its midcap growth rivals tracked by Morningstar Inc., which averaged 4.54%. By comparison, the S&P 500 was up 7.49%. Over the past three years, the fund’s 11.43% average annual gain beat 92% of its direct rivals, which averaged a 7.74% gain, while the big-cap bogey advanced at a 10.98% yearly pace.
Also, the fund’s IBD 36-Month Performance Rating is A. That means the its performance is among the top 10% of all mutual funds in that time.
Helping to drive that record? Nine of the fund’s top-10 holdings as of June 30 had a strong IBD Composite Rating of 80 or better. The Composite Rating, which starts at 1 and runs to 99, combines IBD’s five performance ratings, including EPS and Relative Price Strength Ratings. Stocks poised to move higher often have a high Composite Rating.
Mobileye stock is up 9% this year, though 28% off its 52-week high.
IBD’S TAKE: Mobileye dipped sharply last week, despite beating Wall Street’s Q2 expectations. The downer was news that Mobileye will not extend its relationship with Tesla Motors. IBD’s Paul Whitfield recently explained that Mobileye still has other irons in the fire, including a deal with BMW.
The Israel-based developer of software and related technologies for camera-based advanced driver assistance systems — which play a central role in the rise of self-driving robo-cars — has a strong IBD Composite Rating of 96.
“Tesla is one of many Mobileye customers,” Gordon said. “They are not a significant percentage of sales currently.” Mobileye’s pullback Tuesday was due to investors’ fears that Tesla had found another supplier to provide autonomous driving chips at a lower price. Gordon doubts that’s the case. “And it’s more difficult to imagine that a Ford (F), GM (GM) or even BMW (BMWYY) can do what Mobileye can.”
Vulcan Materials, a building materials company, is up 26% so far this year. It pays a dividend yield of 0.6%, and it has a 97 Composite Rating from IBD, the second-highest possible.
“Aggregates are a good business,” Gordon said. “It is highly localized, and Vulcan has a significant market share in its regions. As such, it has positive pricing (power), including through the last downturn.”
With product volumes near all-time lows in a cyclical business, “that tells us that Vulcan’s risk-reward potential is skewed to the upside,” Gordon said.
The stock plunged 5% Monday to its 50-day moving average after Q2 revenue and earnings came in below analyst expectations.
Monster Beverage is up 8% so far this year, having rallied from a steep decline in February.
EPS growth rebounded 25% in the latest quarter, bouncing back from a 6% decline the prior quarter.
IBD’S TAKE: IBD’s Gillian Rich says Monster is riding a caffeine high, fueled by rising consumption of energy drinks.
“Energy drink consumption continues to gain share of total beverage consumption,” Gordon said. “And their deal with (Coca-Cola (KO)) lets them significantly increase distribution internationally with little operational risk or costs to Monster.”
Teen-targeting discount chain Five Below (FIVE) is up about 58% so far this year. EPS rose 26% and 50% the past two quarters, respectively.
Shares have trended lower in recent years amid investor concerns about same-store sales, Gordon says. “What’s changed is that same-store sales have recovered,” Gordon said, while the chain still has a large opportunity to open new stores. “Another point,” Gordon said, “is that Five Below has the potential to be one of the longest duration growth names in the portfolio.”
Graphics chipmaker Nvidia (NVDA) is up about 70% this year. EPS growth has accelerated for three quarters.
“They’ve traditionally had very strong market share in PC gaming,” Gordon said. “Now they are focusing that same technology on new growth markets, including data centers and automotive. They have big opportunities in virtual reality and autonomous driving.”
“We love to own stocks for five years or more,” Gordon said.” That’s why duration of growth is so important to us.”