3 Growth Names with Room To Run
07/02/2012 7:30 am EST
Asset manager Kier McDonough explains his methodology of seeking out top-performing names in upward-trending markets. In Part One of his interview, he discusses a more mature growth name that has reinvented itself in the electronic payment space, and two recent IPOs in expansion mode.
Kate Stalter: Today, I am pleased to welcome back one of our frequent guests here on The Daily Guru, Kier McDonough of Brigos Capital.
Kier, let's start out with your take on the market-it's certainly been pretty interesting lately-and how your view of the market fits in with your investing methodology, which is to be primarily invested during a confirmed market uptrend.
Kier McDonough: Let's start with the general market. The market itself-when I talk about the market, that would be the S&P 500 and the Nasdaq-the major indices pulled back 10.5% to 11.5% since the correction began in April. So it was about ten weeks, and it was an intermediate type of correction. It wasn't a major bear market; it was just an intermediate pullback.
Both of the indices found support around their 200-day moving averages. We had a big shakeout on June 1 because of a disappointing jobs report. That was quickly reversed, and then the market was trying to get its legs underneath it mid-month. We saw the averages move above their 50-day moving averages, and a few high-quality names attempted to break out at that point.
If we really focus on last week, last Thursday in particular [June 21], we saw a heavy selling day on big volume. So really, institutions were unloading stocks on that day. Yesterday [June 25] we saw the same thing. The market really isn't in sync yet where it looks like it wants to head higher.
And the other component I look at is the action of leading stocks. Any recent breakouts that we saw, most of those have failed. If you're a trend follower, you'd be best served by waiting for some professional accumulation on heavy volume to show up in the market before putting your hard-earned money to work.
Kate Stalter: Let me follow up on something. You've said a lot of great things right there, but I talk to a lot of people who rely on macro forecasts to try to predict which sectors might be in favor. You're really looking at what's happening now-what the major indexes and leading stocks are showing us right now, rather than trying to make any big forecast. Would that be true?
Kier McDonough: That's absolutely right, Kate. No one can predict the market, but you can look at the facts, and you can look at supply and demand, and those are real. And you can base your activity on what the market is actually showing us, not what you're hoping is going to happen or predicting that's going to happen.
Kate Stalter: Say a little bit more than about what you're seeing right now, in terms of the action in some of the leading stocks, and maybe some of the leading sub-sectors.
Kier McDonough: Sure, and that's where I spend a lot of my time, looking for where is the relative strength in the market. Some of the groups that I'm seeing that are getting institutional support and still attracting some interest: Technology, retail, discretionary consumer stocks, some of the builders, and some of the health-care stocks.
One name I like right now is eBay (EBAY). Their payments segment continues to grow rapidly, and that's one of the reasons to own eBay. It's really PayPal, which already dominates the online payment realm, and it's really popular around small business.
What's interesting here is they're now pushing into brick-and-mortar companies, and that market is about ten times larger. For example, Home Depot (HD). Two thousand Home Depots right now will have PayPal by year-end. And we're also looking at a number of other big retailers like Office Depot (ODP), Abercrombie & Fitch (ANF), JCPenney (JCP), Barnes & Noble (BKS)-same thing. They're going to be coming online as well.
I think it's fairly priced. It's been building a nice consolidation for some time and actually broke out a week ago Monday, and when the market came back in, it kind of pulled back into its consolidation. But it's one worth definitely keeping on your radar.
Kate Stalter: Yeah, this is one that I think a lot of growth investors kind of forgot about for a long time, and then it gradually came back. And the transaction space is one that seems to be growing quite rapidly. Fund managers that I talk to really like that space.
Kier McDonough: I think one of the big secular trends we're looking at is the movement from cash, people paying with cash, to paying with plastic, or in this case, digital payment. I think Visa and MasterCard are very interesting companies too, but eBay with their PayPal, I think they have, it's really growing rapidly. A lot faster than their traditional business that they had their marketplace business, so I think there's a big opportunity here.
Kate Stalter: Another area where there are some stocks that you like right now, Kier, is in the food area. That's been more or less a consistent leading theme over the past year or so. There are a couple recent IPOs in that space that seem to be doing pretty well.
Kier McDonough: Sure. One of the reasons I concentrate on recent IPOs is often times you're at the early stages of their big growth. They're not as mature as other companies that might have gone public 20 or 25 years ago. So you're catching them early in their growth phase, which is what I like.
Dunkin Donuts (DNKN) and The Fresh Market (TFM) are two companies that I like quite a bit. Both companies have a lot of room to expand their footprint. Another reason I like these companies is they really don't have overseas or European exposure, and in light of what's going on over in Europe right now and other parts of emerging markets, I like these companies right here.
The Fresh Market, the theme there: people are trying to eat healthier, more organic-type foods. Think of it like a Whole Foods (WFM), just earlier in its growth phase. They're moving into California right now. I think they plan on opening a high-teens number of stores over the next six to eight months, so I think that's a big market for them there.
Dunkin Donuts, which is actually Massachusetts-based, they're really starting to expand west of the Mississippi. They've really gotten their model down. It's a franchise-based model, but I think they're running their business extremely well at this time.
Kate Stalter: That's another one that until very recently had no presence in California, as well, which was kind of surprising. But sounds like there's plenty of room to expand for them, too.
Kier McDonough: Agreed, agreed, and that's when you try, especially with retail stocks-I always try to look at how big is the market, how much have they actually saturated, and if there's still a substantial portion of that market to win. These stocks can still outperform the market in a large way.