Fund manager Matthew J. Moberg doesn’t look just for businesses that are selling popular products or services or that are growing quickly. He searches for companies that he believes will disrupt and reinvent how their industries operate and transform the lives of their customers. While these types of companies are rare and their stocks can be volatile, you need exposure to only a handful of them to power your portfolio returns, he says. Since he became manager of the Franklin DynaTech Fund in 2004 (DynaTech stands for dynamic technologies), he has trounced the long-term performance of the S&P 500 by investing early in innovators such as medical-device maker Stryker, e-commerce giant Amazon and payment processor Visa.
Bottom Line Personal asked Moberg where he thinks the next generation of innovators will come from and which are his favorite ones now…
How to Find Them
We’re undergoing an industrial revolution that rivals the one that started in the late 1700s. Back then, the harnessing of electricity and the invention of the internal combustion engine allowed clever companies to create products and services that became essential to consumers and enabled them to dominate their industries for decades. That’s happening again, but the businesses I hunt for are benefiting from advances in computers, communications and medicine…and changes in how people live and work. As this revolution plays out, I favor stocks of companies that are initially underappreciated by most investors, and then I hold them as they grow much bigger.
I usually take a small position in a company and invest more as it grows. But I typically limit positions in each of these stocks to under 5% of my overall equity portfolio because their short-term prices can fluctuate heavily. Individual investors also should limit their positions. The six companies below can continue to gain market share and grow very quickly for many years…
Alteryx (AYX) is a pioneer in software that allows businesses to sort and analyze the mountains of raw data they capture and collect from customers. Finding patterns in this data and expressing it in charts and graphics provides a company with insights into how to save money and increase profits. The Big Data software industry, as it’s known, is expected to grow 30% annually through 2023. Alteryx’s clients range from Audi and Nestlé to Microsoft and Pfizer. Coca-Cola uses Alteryx software to help restaurants predict how much soda they should order. Dubai International Airport, the busiest in the world in terms of business passenger traffic, used it to figure out how to reduce waiting times in ticketing and check-in lines. Recent share price: $147.08.
Bright Horizons Family Solutions (BFAM) runs more than 1,000 child-care centers in the US and Europe for major companies such as General Mills, The Home Depot and Microsoft. These employers offer child care as a free or subsidized benefit and an incentive to attract and retain top talent. Bright Horizons isn’t just babysitting. It’s reimagining the connection between work and home, offering an array of services such as back-up care to handle school closings and last-minute emergencies…return-to-work programs for workers on maternity leave…college coaching for families with teens…and elder care. Recent share price: $68.15.
IDEXX Laboratories (IDXX). Medical breakthroughs and high-tech treatments aren’t just changing human health care. They have revolutionized pet medicine, which has become a lucrative industry because pets are living longer and pet owners are willing to spend extravagantly on everything from cancer treatments to CT scans to biopsies and hematological testing. IDEXX has carved out a near-monopoly position in developing and selling animal-health diagnostic tools, veterinary hospital software and diagnostic imaging systems in the US and more than 175 other countries. Its extensive menu of canine and feline testing in vets’ offices for diseases and parasites has become popular because many results are available in less than 10 minutes. Recent share price: $281.45.
iRhythm Technologies (IRTC) makes lightweight, easier-to-wear diagnostic medical devices that are redefining and improving how doctors monitor their patients’ health. Its signature product, ZIO XT, is an FDA-approved heart monitor that diagnoses cardiac arrhythmias with a wireless, five-by-two-inch biosensing patch that sticks to your chest and records electrocardiogram (ECG) data from every heartbeat. The company’s cloud-based software analyzes the cardiac rhythms and sends a report to the patients’ physicians. Heart problems and potential strokes often manifest themselves through early signs such as slow, fast or irregular heartbeats. However, many patients still use bulky, expensive ECG devices with data that must be transmitted over a landline. ZIO XT, which is covered by many insurance plans, does not require battery charging or patch changes, and it allows patients to shower, exercise and sleep without disrupting their lives or the data. Recent share price: $88.
Shopify (SHOP) has enabled more than a million small businesses to compete in e-commerce. It provides a compelling alternative to creating a merchant store on Amazon.com, which often forces concessions from third-party merchants that do business on the company’s platform. For a basic $29 monthly subscription, Shopify clients get a suite of software and thousands of apps that allow them to build their own fully functional online stores and customize their sites and user experiences. Also, Shopify is constantly rolling out new business services for additional fees, including payment processing, inventory tracking and shipping. I first bought Shopify when it was much smaller than its recent $62 billion market capitalization. But I think there’s a long runway for growth. Unlike dealing with trillion-dollar Amazon, merchants that use Shopify can customize the boxes and packaging that are mailed to consumers, allowing them to better promote their own brands. And they don’t have to worry that Shopify will one day create lower-priced knockoffs of their products as Amazon.com often does. Recent share price: $535.58.
Tradeweb Markets (TW). Most trading in the $40 trillion US bond market still is conducted the same way it was 40 years ago—over the phone. Tradeweb is a leading builder and operator of online bond marketplaces that allow investors to trade more quickly, find the best prices and minimize transaction costs. Clients include asset managers, hedge funds, insurance companies, banks and brokerage firms. The company went public just last year, but it has facilitated the trading of US Treasury bonds online for more than 20 years. Tradeweb has moved into other fixed-income assets such as corporate and high-yield bonds, each day facilitating trades in more than $720 billion worth of bonds. Recent share price: $51.68.