Deep Dive: Seven stock picks from a five-star money manager’s ‘disruptive’ portfolio

Alex Ely, manager of the $1.9 billion Delaware Smid Cap Growth Fund, says disruptive companies that have taken market share in the coronavirus crisis will continue to do well because they’re fundamentally “better, cheaper, faster.”

“We invest in disruptions,” Ely said in an interview April 28. “They are technologically induced or induced by innovation. When that foundational change happens, there is a secular change in that industry for years to come, sometimes decades to come.”

The advantage of this approach is that the forces driving change are so strong that they continue or are even enhanced by economic upheaval.

“Yes, it matters that there is a crisis, but over the long run, it doesn’t matter what happens. These things will continue on. A young person is not going back to a bank branch,” he said.

Trends and examples of stocks

Here are innovation trends and seven stocks that the Delaware Smid Cap Growth Fund
DFCIX,
-1.09%

owns. “Smid” cap refers to small- and mid-cap. The portfolio is concentrated, with only 35 stocks.

Virtual health care

The Delaware Smid Cap Growth Fund holds Teladoc Health
TDOC,
-3.34%
,
which Ely called “the leading telemedicine company in the market today, in terms of size and the number of patients.” On April 14, Teladoc previewed its first-quarter results and said it was providing 20,000 virtual medical visits a day, which was a 100% increase from the first week of March.

In addition to companies that facilitate remote visits (video conferences) with medical professionals, “there are also companies that will do diagnostics out of your home, or track insulin, blood pressure, heart beat rate, etc., all remotely and more accurately than you would with a one-time analysis from a doctor in a doctor’s office,” Ely said.

One example of a company providing this type of service is iRhythm Technologies
IRTC,
+3.94%
,
which according to Ely “has the best technology for monitoring your heart.” IRhythm uses patches to monitor and collect data to determine whether you have an irregular heartbeat. This allows a physician to monitor millions of heartbeats continually, providing a larger and more accurate data set than traditional monitoring techniques.

Communications and software as a service

RingCentral
RNG,
+0.84%

provides unified communication services to companies, including voice, video, text messaging and social media, across all types of devices. The company’s software-as-a-service model allows integration with various custom and third-party applications.

Everbridge
EVBG,
-3.22%

provides critical event-management services, coordinating emergency messages across various platforms for various government entities and companies.

Okta
OKTA,
+1.28%

provides could-based identity authentication software for enhanced, convenient network security.

Mobile financial services

EHealth
EHTH,
-1.17%

provides a marketplace for consumers to select health insurance and Medicare plans. “Instead of calling an insurance agent, you get your insurance online through ehealth. They are able to provide better pricing,” Ely said.

High-quality foods and drinks

One holding of the Delaware Smid Cap Growth Fund that may surprise you is Boston Beer
SAM,
+1.62%
,
the brewer of Sam Adams Beer. What attracted Ely to the stock was the rapid growth of Boston Beer’s Truly Hard Seltzer group of products, which are “ gluten-free, with only 2 grams of carbs per serving. It is perceived as healthier than beer,” according to Ely.

“Their beer sales are actually about flat right now, but their seltzer sales are up dramatically. It now makes up half their business, growing at 100% a year,” he said.

Significant outperformance

Here’s a chart showing the performance of the Delaware Smid Cap Growth Fund’s Class A shares against its benchmark, the Russell 2500 Growth Index, as well as the S&P 500, for five years through April 28:


FactSet

The performance figures above exclude any sales charges and are after expenses.

With the broad indexes declining this year as so much of the economy has been harmed by the coronavirus shutdown, you might be interested in seeing how well the fund performed during the long bull market. Here’s the same comparison for five years through the end of 2019:


FactSet

That’s remarkable performance, especially when you consider the dominance of passive index strategies. The fund is rated five stars by Morningstar, the financial-research firm’s highest rating.

Innovation trends

Ely is the chief investment officer for small/mid-cap growth equity at Macquarie Investment Management, which is the subadviser for the Delaware Smid Cap Growth Fund.

He further explained the type of long-term industry trends he looks for.

One example is mobile banking, which has been enabled by technological development and the build-out of 4G (and eventually 5G) communication networks. We’re still at an early stage for mobile banking and payments. “There are still 90,000 bank branches in the United States, and they are still growing. Half will go away within the next 10 to 15 years,” Ely said.

To describe the staying power of disruptive innovation, he looked way back: “In the ’80s and ’90s, during that period of expansion, some of the disruptions were PC innovation, with Microsoft
MSFT,
+4.48%
,
and Intel
INTC,
+5.19%
,
and big box stores, such as Walmart
WMT,
-3.43%

and Home Depot
HD,
+1.92%
.
The point of naming these examples is when you had the crash of ’87 or the ’90-’91 recession, you don’t get rid of your PC and bring back a typewriter.”

Even before the coronavirus crisis, it was obvious that media streaming and mobile financial services were “better ways of doing things,” and that virtual health care “was better than going to a doctor’s office,” Ely said.

Fund holdings

Here are the top 10 holdings of the Delaware Smid Cap Growth Fund as of March 31:

Company

Ticker

Share of portfolio

Total return – YTD

Total return – 2019

RingCentral Inc. Class A

RNG,
+0.84%
5.3%

32%

105%

Boston Beer Co. Inc. Class A

SAM,
+1.62%
5.3%

22%

57%

EHealth Inc.

EHTH,
-1.17%
5.2%

15%

150%

NovoCure Ltd.

NVCR,
+0.97%
5.2%

-14%

152%

iRhythm Technologies Inc.

IRTC,
+3.94%
4.6%

48%

-2%

Okta Inc. Class A

OKTA,
+1.28%
4.5%

28%

81%

SiteOne Landscape Supply Inc.

SITE,
+11.91%
4.4%

-5%

64%

YETI Holdings Inc.

YETI,
+7.31%
4.1%

-23%

134%

Everbridge Inc.

EVBG,
-3.22%
4.1%

49%

38%

Teladoc Health Inc.

TDOC,
-3.34%
4.0%

116%

69%

Source: FactSet

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