- Ronald Zibelli, a fund manager at Invesco, has outperformed most of his peers and delivered a 16% annual return since 2009 by hunting for “premier growth” companies.
- In an exclusive interview with Business Insider, he detailed three stocks driving his performance today and discussed how the dot-com bubble shaped his investing process.
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Ronald Zibelli will never forget the dot-com boom.
His fondest memory is not the frenzy that inflated the bubble or the market crash and recession of the early 2000s.
Instead, what stands out to this day for the Invesco fund manager is one company’s rally: Cisco Systems.
He said that in 1990 – long before euphoria consumed the tech industry – an analyst he followed recommended the stock while its market cap was still about $500 million. He heeded the advice and rode the stock for 10 years, all the way to a $250 billion market cap in 2000, right before the bubble burst.
“That was a formative experience for me as a growth investor,” Zibelli told Business Insider during a recent interview.
He added: “I realized that there is a small number of companies that are able to achieve unusually large returns for investors – and those are almost always growth companies. That was a formative experience in the development of my investment process that I use today with my team.”
Zibelli now runs the Invesco Oppenheimer Discovery Mid Cap Growth Fund, a mid-cap portfolio of growth stocks, in addition to other small-cap strategies. The discovery fund has averaged a 16% annual return since 2009 and is outperforming 92% of its peers so far this year, according to Bloomberg data.
His “secret weapon” lies in having the same team manage the small- and mid-cap portfolios. This structure allows them to use the small-cap portfolio as a cultivation ground for companies that eventually outgrow their small-cap status and graduate into the mid-cap fund.
More than half of his mid-cap holdings are either current or former names in the small-cap portfolios, he said.
Read more: Nobel laureate Robert Shiller forewarned investors about the dot-com and housing bubbles. Now he tells us which irrational market behaviors have him most worried.
To achieve this kind of growth, Zibelli said the team judged companies by four main characteristics.
The fund’s size-specific style means they first screen for companies that meet the market-cap threshold, which typically tops out at $5 billion for small caps and $40 billion for mid-caps. These companies should also be growing at above-average rates in size. Zibelli said that this screening was the “easy” part.
Beyond this, the process gets more intensive. He looks for management teams with a track record of executing on their business plans, driving earnings growth, and returning wealth to shareholders.
Relatedly, he hunts for companies that are leaders in their fields. This could be in terms of firms with the largest market share, or those that have virtually no rivals because they are pioneers in their area of business.
The fourth leg of the stool involves finding companies that are likely to sustain their competitive advantage over time in markets that are growing quickly. He finds companies even more attractive if the growth depends heavily on the US versus overseas and is relatively immune to changes in the economic cycle.
3 ‘premier growth’ stock picks
Zibelli shared three stocks that embody these characteristics – and which have helped his team deliver their market-beating performance. All the quotes below are attributable to him.
1. CoStar Group (+79% year to date)
“It’s a Bloomberg-like service, but for the real-estate community. They provide this information to brokers, investors, buyers, and lessors, and it’s constantly changing and being updated.
“It’s become a great example of leading market position, great management, above-average growth profile, and compounding year after year at high rates.
“In the last four years, their earnings per share has gone from $2 to $10, and the stock has been a fantastic performer. That’s an example of the kind of compounder that is a long-term holding in our portfolio.”
2. RingCentral (+120% YTD)
“They’re a leading provider of unified communications as a service.
“They offer subscriptions to enterprises to upgrade what’s typically been old hardware and software that is very difficult to use or upgrade to digital communications. They compete with companies like Avaya, which has a huge install base of really old technology. With RingCentral, companies can update to digital voice, video, messaging, conferencing, etc.
“This company went public six years ago at $13 a share. It’s trading up in the 170s. They’ve been compounding revenue growth at 30%-plus the whole way. They’ve got great management, great technology. They’ve got weak competition, and it’s a big, fast-growing market. That’s exactly the kind of name that drives our effective stock selection in our portfolios.”
3. Dexcom (+34% YTD)
“There’s been a real revolution in the treatment of diabetes in the last several years. Dexcom is one of the causes of that revolution. They’re a leading provider of diabetes-treatment technology called diabetes glucose monitors.
“It’s a small sensor that you attach to your abdomen and that reads your glucose every few minutes, communicates the output to your phone, digital watch, or computer, and provides alerts if your insulin level is outside of healthy ranges. These devices are now starting to communicate wirelessly with insulin pumps. You’re getting to the point where you’re approaching having an artificial pancreas.
“Again, the similarity here is superior technology, great management, fast growth, and disrupting previous technology. This company is up tenfold since the end of 2012, while their revenues grew proportionally from $100 million to $1 billion.”