$7B Fund Manager Picks Amazon, Other Growth Stocks

Growth stocks have increased dramatically in value in recent years.

The Vanguard Russell 1000 Growth ETF (VONG) recorded an annual return of 33% for the 12 months ended September 18 and 16% for the past 10 years.

Dan Davidowitz is a growth investor. He is co-manager of the Poland Growth Fund (POLRX) which has $7.1 billion in assets and a minimum investment of $3,000. Polen Capital had total assets under management of $65 billion as of June 30.

According to Morningstar, the fund generated a return of 20% over the past 12 months, -2% over three years, 11% over five years and 14% over 10 years.

These figures lagged the Vanguard ETF mentioned above in each period. Indeed, the Poland fund outperformed the Vanguard ETF in four of the ten years from 2014-2023.

Dan Davidovitz, analyst and portfolio manager, Polen Capital

Poland Capital/TheStreet

Davidowitz and his colleagues follow a strict process for choosing Poland Growth stocks. They select only companies with clean balance sheets and strong cash flow, return on capital, profit margins and organic revenue growth.

TheStreet recently spoke with Davidowitz about the fund as part of our expert interview series. Here’s what he had to say, including stock picks.

TheStreet.com: What is your investment philosophy?

Davidowitz: We have a concentrated portfolio of 20-25 stocks (23 at the moment). We like companies that can grow their earnings by the mid-teens (percent) or more annually.

They have less risk because they are the best companies. And mid-teens earnings growth produces mid-teens returns.

Definition of quality stocks

TheStreet.com: Given your focus on quality stocks, how do you define quality?

Davidowitz: There are five prerequisites when choosing stocks.

• Balance sheets with lots of cash and little debt,
• Excess free cash flow each year,
• Return on capital of at least 20%,
• Stable or increasing profit margins, and,
• Better than average organic revenue growth.

Sustainability is required in each of these areas.

That leaves us with a pool of only 200 to 300 companies. We do in-depth fundamental research to make a selection from them.

They are not always available at great prices or running at full speed. We are constantly repeating our research. We usually buy or sell two or three stocks a year.

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We try to own companies while they are in a growth phase. But it is not all fast growth. Some have earnings growth of 11% to 12% per year, but offer safety. Our average holding period is about six years.

TheStreet.com: Are there any particular sectors or market themes that particularly appeal to you?

Davidowitz: We are bottom-up investors, who look at individual companies that meet our criteria in a sustainable way. There is usually something that drives them, such as digital advertising that is driven by companies like Google, owned by Alphabet (GOOGL) .

We don’t think about advertising (as a catalyst), but rather about Google increasing the opportunity. These are companies that dominate their sector or very differentiated companies in a very fragmented market, such as IT service providers Accenture (ACN) .

The best companies are now often found in the tech, healthcare and consumer sectors. Great companies are much less present in standardized industries such as financial services, energy and industrials.

Every now and then we come across companies in the financial services industry, such as payment companies Visa (V) And MasterCard (MA) although I wouldn’t label them as financial.

Downturn strategy, favorite stocks

DeStraat.com: How is the fund protected against a major market decline?

Davidowitz: When a recession hits, companies that meet our guidelines generally avoid a drop in profits. They continue to grow. Our portfolio has a balance between growth and safety.

TheStreet.com: Can you tell us about your three favorite stocks?

Davidowitz: 1. Our largest holding company is Amazon (AMZN) . It has some of the most competitive advantages in the world. It has underrated earnings growth and a comfortable valuation.

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It has at least three businesses. E-commerce has a profit margin of about 3% to 5%. Amazon Web Services, the cloud division, has a margin of 30%. And advertising, which is tied to e-commerce, has a margin of 70%.

Margins are improving across all three divisions, with the fastest growth occurring where margins are highest. The company-wide profit margin is 10%, above pre-Covid levels. And there has been a lot of progress on increases.

2. Software/database company Oracle (ORCL) is our newest acquisition. We owned it before, but not since 2019. They had slow growth for a while because they were focused on on-premises service. They were slow to move to the cloud.

Over the last few years they have built Oracle Cloud Infrastructure and are now the number 4 cloud service provider. They are late to the game, but they have done it differently.

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They have small data centers to run public or private clouds. They often set them up at the customer’s premises, provide security, and make it cheaper and more efficient than others. Last quarter they had 8% organic revenue growth, and that should accelerate.

3. Adobe (ADBE) the content management services provider. It dominates the creative software market. There is a debate about whether generative artificial intelligence is good or bad for business.

They were early to build AI into their design software. But there are also things that standalone AI can do for free. We think they’re complementary. You can use AI inside Adobe or you can bring it in from outside.

Creatives need Adobe tools, even if they’re using a third-party AI service. We recently expanded the position we’ve had for years.

The author owns shares in Alphabet, Mastercard, Amazon and Adobe.

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