Daniel Morris, manager of top mutual fund Manor Growth Fund (MNRGX), admits he has a conservative streak.
He's not the type of stock picker who buys growth stocks at any price. If a company — no matter how peppy their growth rate — is selling at an unreasonable valuation, he won't buy the stock. It's just not his style.
"We take a conservative approach," Morris told Investor's Business Daily.
Top Mutual Fund Looks At Management
Morris favors well-managed companies with the potential to grow. He also wants to see a sound financial structure to support growth and strong free cash flow. His objective? "Invest in those types of companies when their share price gives us the opportunity to invest at reasonable valuations," he said.
Morris says what makes Manor Growth different from most other funds in his peer group is how he begins his stock search. "We start with valuation," Morris said. He prioritizes valuation over earnings growth rates or the pace of sales. Like Warren Buffett, Morris looks through a valuation lens as if he were buying the whole company.
If a stock has a nosebleed valuation and doesn't meet the fund's other selection criteria, he won't bite. Manor Growth's concentrated 26-stock portfolio sports a P-E ratio of 15.2, according to fund tracker Morningstar. That's well below the 23.5 average P-E of the large growth category the fund is compared to. It's also cheaper than the S&P 500, which currently trades at 19 times earnings.
Paying The Right Price
The fund's search for growth at a reasonable price is highlighted by its sector allocation At the end of 2022, the most recent data available, Manor Growth had an underweight in technology, with 27.7% of the fund's assets invested in tech, vs. 34% for the large growth category. And the fund's top sector holding, health care, which accounted for 28.5% of fund assets, is a huge overweight compared to the 16% category weighting.
At year-end, four of Manor Growth's top-10 holdings were health care names. They include managed care insurer UnitedHealth Group, pharmacy chain CVS Health, drugmaker Eli Lilly, and medical equipment maker Thermo Fisher Scientific.
"They're well managed," said Morris, adding that they're still trading at a bit of a discount versus earnings growth and cash flows. Still, these defensive stocks are less attractive than they were last year due in part to strong performance, he says.
A Process That Works For Top Mutual Fund
Morris' investment process, which is designed to build portfolios that can withstand bouts of volatility but also take advantage of market rebounds, has served investors well. Manor Growth's 15.4% annualized total return over the past three years, its 11.3% five-year gain, and 12.1% 10-year advance all topped the S&P 500. In the past three years, the fund's performance has topped 94% of its peers. It's a 2023 IBD Best Mutual Funds award winner.
Manor Growth's year-to-date return of 5.8%, though, trails the S&P 500's 7.9% gain.
The fund's growth-at-a-reasonable-price approach could continue to benefit investors if Morris' cautious market outlook plays out. Morris questions the stock market's strong start to the year. He says investors' hopes for a Federal Reserve pivot to a more accommodative monetary stance spurred the rally. "Inflationary pressures are not trending down fast enough, and so the Fed will need to move more cautiously," Morris said.
So, if the market doesn't get the Fed pivot they're betting on, stocks could struggle, Morris says.
Top Fund Manager's Conservative Playbook
Morris isn't averse to buying leading growth stocks after price stumbles make them more attractively valued. A good example is a recent addition to Manor Growth's portfolio: Enphase Energy. The $21.1 billion annual run rate Fremont, Calif., company makes and sells micro-inverter solar panels, battery energy storage systems, and electric vehicle charging stations.
The stock recently went from wildly overvalued to a sweet-spot-type valuation for the alternative energy space.
After warning of slowing sales on April 26 in an earnings call with analysts, citing weaker demand for solar panels amid a higher interest rate environment, the stock cratered 26% in a single day. Shares are now more than 50% below their December 52-week high. Enphase Energy's P-E has gone from 99 in 2020, to 61 in 2021, to 55 last year, to its current multiple of 30 times earnings, according to Morningstar.
"We're investing in infrastructure to facilitate renewable energy and that's really where Enphase's focus is," said Morris. Enphase Energy, he adds, will benefit from still-to-come government spending on renewable energy initiatives. "There's a lot of money for green energy projects," Morris said.
Top Mutual Fund: Digging Into Energy
Morris' conservative streak has also pushed him toward the traditional energy sector, a one-time laggard that has delivered the best returns (+262%) of all S&P 500 sectors since the Covid-driven low on March 23, 2020, according to S&P Dow Jones Indices. At the end of 2022, the fund had nearly 8% of its assets in energy, three times more than the large growth category's 2.4% weighting.
Manor Growth owns 3.5%-plus stakes in oil exploration and production play Occidental Petroleum, and oil and gas provider EOG Resources, which sport P-Es of 10.1 and 9.4, respectively, according to Morningstar. "They still have decent valuations, and we remain invested in them," Morris said. Higher prices and still-solid demand amid a lengthy transition to alternative energy sources help traditional oil companies.
Finding Value In Tech
Despite the tech-stock packed Nasdaq suffering the biggest decline of the major U.S. stock indexes in the recent stock swoon, Morris still views iPhone maker Apple, and software and cloud-computing giant Microsoft as go-to stocks. "Yes, I think they are," Morris said.
The fact that the two tech giants are not as pricey as they once were makes them even more attractive. "There's no question that they're not trading at the valuation premiums like they had been," Morris said. While the fund remains underweight tech, owning these two powerhouses is a way for Morris to maintain tech exposure at a reasonable price.
Microsoft, for example, now trades at nearly 28 times earnings, which is its lowest valuation since 2018, according to Morningstar. Apple now trades at 29 times earnings, up from a P-E of 21 last year, but that's due largely to the stock's 30% gain this year.
Why Top Mutual Fund Manager Likes ON Semiconductor
Supply chain woes and a slowing economy have dented interest in semiconductor stocks. But Morris is still a fan of ON Semiconductor. Chip demand will kick in again, Morris says. And ON Semiconductor is well-positioned to take advantage of the long-term shift toward digitization. "It's not a bad place to be," Morris said.
