If you’re looking to diversify your stock portfolio, you might consider the midcap growth sector.
We recently spoke to a mutual-fund manager in that area: Chris Retzler, co-manager of Needham Growth Fund (NEEGX) , which has $225 million of assets.
The fund has registered annualized total returns of 39.16% over the past 12 months, 8.03% over three years, 18.75% over five years and 11.93% over 10 years. That handily beat the S&P Midcap 400 index for all those periods.
Retzler says midcap stocks are more mature than small-caps and provide diversification from large-caps. And growth stocks could be headed for a rally if interest rates fall, he says.
Among the fund’s favorite sectors are technology, health care, industrials, aerospace and defense. Here’s what Retzler had to say, including his stock picks.
TheStreet.com: What is your investment philosophy?
Retzler: It’s growth at a reasonable price. We try to take advantage of dislocations at companies with good management, technological moats and long production and service cycles.
Our analysis is bottom-up with a view toward industry trends we think can last for the long term. We try to be long-term investors. We have names that have been with us five years and 20 years.
Needham/TheStreet
TheStreet.com: What’s the attraction of midcap stocks?
Retzler: Midcap companies often have multiple products and services while small-caps often don’t. Midcaps are past the initial buildout stage.
Small companies have more of a need for capital markets. And those markets are being more selective in accepting companies as zero interest rates are gone. It’s a struggle for small-caps.
Midcaps have more opportunities to access capital markets when they need them.
As for large-caps, we like to find companies that aren’t household names but can add value for investors. We can find [returns] away from large-cap.
Related: $1 billion fund manager reveals three midcap stock picks
TheStreet.com: What do you like about growth stocks?
Retzler: Midcap growth names suffered from hangover effects of covid over the last several years. Supply chains and inventories were a problem. Certain areas got ahead of themselves during covid.
Higher cost of capital has put pressure on companies with more leverage. But we are near the peak of rising interest rates. The Federal Reserve will likely cut rates later this year or next. That will benefit growth companies disproportionately. Growth-stock valuations should improve.
TheStreet.com: What industries and market themes do you like?
Retzler: We generally have a strong allocation to technology, such as semiconductors and capital equipment for them. [The U.S. and other countries are building up their semiconductor-production capacity.]
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There are long-term positive trends, including artificial intelligence, automation and data processing.
We like specialty materials, such as ones that go into semiconductor manufacturing and lasers that help drive technological advances.
For AI, of course, there’s the Magnificent 7 [Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla]. But we look at what’s tangential to those businesses as AI grows. What are the applications?
That widens to software companies and applications manufacturers. Also how does AI benefit users? Markets are trying to figure out the winners and losers. AI is the next big trend for society.
We like health care, too. Innovation is continuing, with new drug trials and processes. Other strong areas for us are industrials, aerospace and defense.
Related: Veteran fund manager reveals 3 growth stocks with upside potential
TheStreet.com: Are there any areas you avoid?
Retzler: You don’t see much finance, utilities or real estate in the fund. We don’t have anything against them, but they’re more value names as opposed to growth at a reasonable price.
TheStreet.com: Can you discuss three of your favorite stocks?
Retzler:
1. Thermo Fisher Scientific (TMO) , the giant science equipment provider. It has multiple products and services and a global footprint. It focuses on a variety of industries and technologies. It’s well run by its management team.
2. Super Micro Computer (SMCI) , a provider of server technology services. It has been a big winner for us [returning 250% over just the past year]. It’s a play on the buildout of data center and services.
There’s a long-run opportunity to deploy more servers as chips continue to be developed. It’s an evolving industry for AI and data-center buildouts. SMCI should be a beneficiary.
3. NLight (LASR) . There’s a sizable opportunity for them to help the military as it continues to modernize its assets. Their lasers help provide lower costs for weapons that defend against incoming artillery. They can be used in defensive maneuvers to protect allies.
Related: Veteran fund manager picks favorite stocks for 2024
