No mystery to May. The broad market in the form of the S&P 500 was down 6.35%. But despite May’s malaise, Lord Abbett’s Tom O’Halloran sees a path to finding quality stocks to invest in.
O’Halloran seeks investments that, at least so far, have been largely immune from trade-war fallout. Referring to the four retail funds of which he’s lead manager, O’Halloran said, “The four growth strategies I manage invest in innovative companies, capitalizing on the technology revolution, which is underestimated in terms of its strengths.
“We seek innovative companies that are high quality and demonstrate healthy operating momentum,” he added. “By that, we mean healthy sales and/or earnings growth. We are growth investors who seek high-quality companies that are growing at a healthy rate by exploiting the commercial opportunities enabled by the technology revolution.”
That approach helped protect his funds amid May’s volatility. While the broad market was down 6.35%, O’Halloran’s $3.7 billion Lord Abbett Growth Leaders (LGLAX) lost less, 3.90%. Over the three years ended May 31, the fund’s 17.31% average annual gain topped 87% of its large-cap growth peers.
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Stocks To Invest In: May’s Culprits
O’Halloran identifies May’s culprits as the escalating trade beef between the U.S. and China, and fears of slowing economic growth.
“Things took a turn for worse recently between the two countries,” said Tom O’Halloran, whose other funds are $1.9 billion Developing Growth (LAGWX), $130 million Micro Cap Growth (LMIYX), and tiny $6.7 million Focused Growth (LFGAX). “That dispute rose to the forefront (of investors’ worries) the same way the Federal Reserve’s interest rate hikes rose to prominence in October 2018.”
Still, both countries have incentives to resolve the spat, O’Halloran said. “The trade difficulties and lack of (a trade) agreement have caused a growth slowdown in China,” he said. “And they’re beginning to lead to the possibility of a growth slowdown in the U.S. We see U.S. Treasury yields flattening, an indication of a possible slowdown. And utilities, REITs and staples are doing well. All are signs of a market slowdown.
“When the two countries strike some agreement, the market will resume its uptrend,” he added.
Still, a resolution may take time. O’Halloran does not expect to see easing of trade tensions until the second half of this year.
How Segments Of The Market Performed
Reflecting May’s setback by the S&P 500, U.S. diversified stock mutual funds fell 6.11% on average last month, according to Lipper Inc. Midcap growth funds were the top-performing U.S. diversified subcategory, losing 4.90%.
World equity funds did slightly better than U.S. diversified stock funds, losing 5.54%.
The best-performing geographic market was India region funds, eking out a 0.52% gain.
Among major sector fund groups, precious-metals funds outpaced other categories by advancing 1.89%. The group traditionally is a hedge against market declines.
As for bonds, renewed trade-war tensions and concerns about a global economic slowdown pushed Treasury yields to their lowest levels in nearly two years in May.
As a result, government bonds surged while riskier assets gave back a big chunk of their April gains.
Stocks To Invest In: How O’Halloran Finds Them
O’Halloran says the tech revolution he’s focusing on hinges on innovations that lead to rapid increases in computer processing power. “The big applications of that revolution have been in areas like e-commerce, cloud-computing software, social networks and search,” he added.
“The pioneering companies are not affected by the China-U. S. trade situation because they are developing newer markets that are not caught in the teeth of the dispute,” O’Halloran added. “The dispute at this point involves physical consumer and business goods and technology manufactured equipment. It has not hit these revolutionary types of software, social networks and e-commerce directly.”
‘Amazon Of The Amazon’
One of O’Halloran’s key e-commerce plays is Argentina-based MercadoLibre (MELI), Latin America’s e-commerce giant. “It is the Amazon (AMZN) of the Amazon,” O’Halloran quipped. “They have taken the Amazon playbook, which worked so well in the U.S., and applied it to Latin America.”
The business started as a third-party market for e-commerce, selling goods that others produced, O’Halloran says. “They’ve moved beyond that,” he said.
Just as eBay (EBAY) was the incubator for PayPal (PYPL), MercadoLibre has its Mercado Pago payments platform. “In fact, the company is partnered with PayPal on the digital payments part of its business,” O’Halloran said. The idea is to make mobile and all digital transactions easier for consumers, he says.
“MercadoLibre should grow its top line 20% a year for another decade,” O’Halloran said. “If it does, it will be six times as large as it is now. The penetration of e-commerce and digital payments and e-commerce logistics is much lower in Latin America and Central America than in the U.S. We think both will grow, and that Latin America will catch up to where the U.S. has been.”
O’Halloran also favors MercadoLibre because it’s immune to the trade-war headwind. “It has no trade worries with China,” O’Halloran said. “They are going after a large opportunity, and are the lead horse right now.”
Love And Money
In social networks, O’Halloran likes Match Group (MTCH) as a stock to invest in. The firm runs several online dating platforms. These include dot-coms Match, Tinder, OKCupid and Hinge. Several of its sites cater to different audiences.
Through all of its sites, Match has barely penetrated a large pool of potential users. “There are 300 million singles worldwide who could use dating services,” O’Halloran said. “Match has just under 9 million paying subscribers.”
And Match has invested in features that make its sites more attractive. Tinder’s “likes you” feature lets a user check out people who’ve expressed interest in them. “So it’s a more effective option to get a date,” O’Halloran said. And only pay subscribers can access the “likes you” feature.
Features like that are helping fuel Tinder’s 35% annual revenue growth. And Tinder has 70% year-over-year (Q1 2019 vs. Q1 2018) incremental profit margins, O’Halloran says.
Yet Tinder has room to grow, with only 7% to 8% of users paying for their subscriptions. The rest have free access, from which Match generates revenue through advertising.
Among cloud-computing stocks to invest in, O’Halloran likes ServiceNow (NOW). “They’re a horizontal application that takes all of the computer equipment that a company has and makes it all work together across all departments,” O’Halloran said.
“That’s essential in a world where corporations and governments increasingly make their workflows digital,” he added.
ServiceNow’s reward is 35% annual revenue growth, O’Halloran says.
Everbridge (EVBG) is another cloud play. Everbridge’s cloud software enables businesses and governments to automate and speed up their responses to emergencies. Each customer’s response routine is customized to its needs, O’Halloran says. The idea is to save lives, property and money.
“Everbridge created this market,” O’Halloran said.
Everbridge is growing its organic revenue at a 35% annual pace, O’Halloran says. “This is something that every business and government will purchase,” he said.
For more fund managers’ stock market forecasts and insights on leading stocks, check out Ken Turek of Neuberger Berman Small Cap Growth Fund and Stephen Goddard and Brian Campbell of Touchstone Mid Cap Fund.
Please follow Paul Katzeff on Twitter at @IBD_PKatzeff for more tips about growth stocks, growth mutual funds and active mutual fund managers who outperform the market.
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