Like many others, fund manager Jim Gaughran has made his fortune in mega-growth stocks.
For the past 19 years, Mr. Golan has consistently posted solid returns as manager of the $2.2 billion William Blair Large Cap Growth Fund (LCGNX). The past decade or so has been particularly friendly for Mr. Golan and co-manager David Rich, who joined the fund near the beginning of 2012.
Large, high-quality growth stocks have been in vogue since the early 2010s, but that alone doesn't explain why Golan's fund outperforms its peers. The fund has been in the top 10% of its category over the past decade, including five 28% gains since 2017, according to Morningstar.
The market veteran is especially bullish on four stocks with at least an 8% weight: Microsoft (MSFT), Amazon (AMZN), NVIDIA (NVDA), and Alphabet (GOOGL). These companies have led the S&P 500 index with gains of 79% to 1,672% over the past five years.
Golan told Business Insider that large growth companies are certainly in the mix, and he doesn't think another sector or group will overtake the market top spot anytime soon.
“The improvement in profitability from a margin, free cash flow margin standpoint, has been really dramatic over the last 10 years or so,” Golan said in a recent interview. “And as we look out over the next few years, I don't see that changing in any meaningful way.”
Why will large-cap stocks continue to drive growth?
Investment firms have praised small-cap stocks in recent weeks, arguing that they are unfairly penalized and overly discounted from a valuation standpoint.
Golan doesn't deny that small- and mid-cap stocks are cheaper than large-cap stocks, but he thinks the difference is justified. He believes large-cap stocks will not only outperform as interest rates rise, but could actually widen their lead on this backdrop.
Conventional wisdom holds that higher interest rates disproportionately hurt fast-growing companies by lowering the present value of a company's future earnings, thereby compressing stock valuations.
While that may be true, Golan pointed out that higher interest rates will also make growth more difficult because borrowing costs are higher than they were in the 2010s when today's big tech companies rose.
So while the market may not reward large growth companies with the earnings multiples they are accustomed to, higher interest rates will allow would-be challengers to build products and services that outperform entrenched leaders such as Alphabet, Amazon, and Microsoft. should be prevented. Nvidia.
“If we're in a higher interest rate environment, these companies have better balance sheets, from a debt-to-equity perspective, from a free cash flow perspective, compared to smaller companies that probably have higher interest rate potential. “It was taken advantage of,” Golan said.
Golan continued, “This gives us confidence that given the dominance of these platforms and the size of these companies, we should see pretty decent performance in the large-cap space as we move forward over the next few years. You can get it,” he said. It was developed in the last 10 years or so. ”
How to invest in large-cap growth stocks — and our 4 top picks
To impress Mr. Golan, the stock must have scale and other structural advantages that will lead to success over his three- to five-year investment horizon. He also likes companies that are growing profits faster than other companies in their industry, which itself should be growing faster than the economy as a whole.
From there, fund managers base their portfolios on each company's business model, growth potential, level of earnings and cash flow, pricing power, spending on research and development, and importantly, the quality of its management team. Narrow down the candidates.
And while Golan doesn't worry too much about the valuation of large-cap growth stocks compared to unprofitable small-cap stocks, he does consider how a company's earnings multiple stacks up against its peers.
“It's a combination of being confident in growth but also factoring in valuation,” Golan said.
Most growing companies don't fit Golan's criteria, so he only holds a few dozen positions at a time. His fund currently holds 32 stocks, which puts it in the middle of its normal range.
Below are four companies that major fund managers are particularly bullish on, along with their tickers, market caps, sectors and theories.
