Portfolio Manager Perspectives

Jeff Benjamin

Investing according to GARP: Seeking companies creating dynamic change or disruption

In a slow-growth economy, investors should look at good companies with small share of large markets

Oct 12, 2012 @ 3:43 pm

By Jeff Benjamin

With the global economy in a period of long-term slow growth, it is important to focus on good companies with a small share of a much larger market, according to Jeff Coons, president and co-director of research at Manning & Napier Inc.

“You need to find those companies that are capable of transcending the slow-growth environment that we're in and will be in for a while,” he said.

Beyond just avoiding weakening fundamentals and expensive valuations, Mr. Coons said his specific growth investing strategy includes “looking for companies that are creating some dynamic change or disruption that allows them to grow the top-line [revenue] while the bottom-line profits catch up.”

Mr. Coons compared his “profile growth strategy” to that of the popular growth-at-a-reasonable-price, or GARP, strategy.

“We want some growth potential as well as a sustainable advantage, but we're going one step beyond to find companies with a small share of a large market,” he said.

Amazon.com Inc. Ticker:(AMZN), for example, is considered to have a small share of the much larger overall retail market.

“Some people will talk about Amazon being expensive, but we look at the growth potential and we don't think it's expensive at all,” he said.

With an eye-popping 295 price-to-earnings ratio after a 41% stock price rally from the start of the year, the stock is understandably considered pricey, but Mr. Coons prefers to focus on where the company is headed from here.

“This company is doing something different to unlock the potential of the market with its online sales, and reliability in payment and delivery systems,” he said. “Amazon is changing the dynamic for legacy retailers that have larger costs due to their physical-store presence.”

Another company in which Mr. Coons is expecting big things is Riverbed Technology Inc. Ticker:(RVBD), which develops network optimization systems.

“They have 70% of the current market, but the market is only 20% penetrated,” he said. “This is a market that is going to continue growing with the expansion of things like cloud computing.”

With a P/E of 57 and a stock price that has fallen by 6% from the start of the year, Riverbed might be a tougher sell for some investors, but it still represents the future, according to Mr. Coons.

“This is the best and strongest player in that market, and the market has a long way to go,” he said. “It's important to find companies that will be able to grow in a slow-growth environment.”

Manning & Napier has $42 billion across multiple portfolio structures.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. Visit InvestmentNews.com/pmperspectives for more information.

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