Jim Golan, co-manager of the William Blair Large-Cap Growth (LCGNX) (LCGFX) mutual fund, has helped forge impressive long-term returns.
Among the large-cap growth stock funds ranked by Morningstar, the Blair fund ranks in the 13th percentile for the past five years, with an annualized return of 10.95%. And it ranks in the 12th percentile for 10 years, at 13.86%.
Golan thinks that now is a good time for the quality growth stocks that his fund seeks. That’s because in times of economic weakness, such as this year, those stocks thrive. They also do well in times, like now, of high inflation and interest rates.
Value stocks have recently outperformed growth. But that has put growth stocks at more attractive valuations, priming them for a rebound, Golan says. Among his favorites are Nike (NKE) and Linde (LIN), the world’s largest industrial gas producer.
Street.com: What’s your investment philosophy?
Golan: We look for secular growth companies. It’s ones that are in industries where profits are growing faster than the economy for the next three to five years, which is our investment period.
It’s companies that can take a share of the industry’s growth due to competitive advantages. They have pricing power and cultures of innovation. They can grow earnings faster than the industry.
We are long-term investors. Our turnover last year was 20%. We have a concentrated portfolio of 30 to 35 stocks typically. We add five to six each year and sell about the same amount. Our average holding is four years, but some are well over a decade.
Street.com: What’s your outlook for the overall market this year?
Golan: Last year was about inflation, interest rates and a bear bond market. Equities were collateral damage, especially growth stocks. This year the question is soft landing or hard landing for the economy.
It’s anyone’s guess. It comes down to [the] Fed. It’s trying to squash demand. Whether there will be a recession is debatable. If so, it probably won’t come until the second half of the year and will be relatively mild.
Our focus is on company fundamentals. If economic growth becomes more scarce, it helps to find all-weather companies with quality growth that can ride out recession.
This year, the market will probably have a lot of volatility and end a little higher, after the Fed finishes its rate hikes.
William Blair
Street.com: What do you think about growth versus value stocks this year?
Golan: Value has had a great run over the past 2 ½ yrs. Growth stocks were hit hard last year versus value. Growth stocks now have attractive valuations. Quality growth stocks are set up to do well.
Street.com: What’s your outlook for technology stocks?
Golan: They saw a tremendous run since the [2007-09] financial crisis. Last year was tough because of higher interest rates. But the secular trends are still in place: cloud-based computing, a shift to software as a service and the electrification of the global economy.
We are going through a digestion phase after tech companies over-hired during the pandemic. I think 2024 will see a re-acceleration of the trends and technology spending by businesses. With sticky inflation and higher interest rates than the last decade, the advantage goes to more established companies with actual earnings.
Street.com: Can you tell us about two of your favorite stocks?
Golan: 1. Nike. It’s a tremendous global brand. It was hit last year primarily by supply chain issues. They had too little supply at the beginning of the year and too much at the end. We think the supply chain problems will recede.
The other issue was China’s lockdown. China represented 14% of revenue last year, compared to about 20% pre-covid. That will improve. As China opens up, that should benefit Nike. It can get back to more than 20% in the next few years.
Nike also will benefit from its push to sell directly to consumers online. That way Nike collects 100% of revenue from a sale, [rather than sharing with a retailer]. E-commerce accounted for 8% to 9% of Nike’s revenue pre-covid, rising to 25% during the pandemic. We think it can go over 30% in the next three to four years.
2. Linde. It has tremendous recurring revenue, and it holds up well in recessions. Revenue fell only in low single digits in 2008-09. It’s in an oligopoly business. (The other two global competitors are Air Products (APD) and Air Liquide (AIQUY) ).
Once you have gas assets in a region, you get pricing power. Linde has that on the Gulf Coast, in Latin America, Germany, the U.K. and Taiwan.
Linde will benefit from the U.S. emphasis on semiconductor production, because making chips involves industrial gases. Linde has high return on equity and buys back a lot of shares.
The author of this story owns shares of Nike.
