This fund manager’s top 2020 stock picks averaged 170%. You are betting on these companies for 2021

Staying one step ahead of the COVID-19 pandemic, at least as far as stocks go, paid off for fund manager Gerald Sparrow last year. By 2021, he hopes that online gambling, education and pets will be the places where the magic of the action is.

Sparrow manages the Sparrow Growth Fund SGNFX,
+ 0.45%,
a $ 97 million mid-cap fund that was in the top 4% of its category last year, with a 98% return, according to Morningstar. The fund, which has had an average annual return of 37% for five years and 48% for three years, had $ 31 million under management when MarketWatch spoke with Sparrow in June 2020.

Read also: A buying strategy of ‘the fastest growing companies in America’ has paid off for this investor in 2020

At the time, he was advocating for Snap SNAP,
– Snapchat messaging app matrix – Carvana CVNA online car salesman,
and Roku ROKU streaming media player,
Those companies, with respective 2020 earnings of around 200%, 160% and 147%, were pandemic plays that boosted growth fund returns.

Sparrow’s methodology involves monitoring US stocks of all sizes and categories and classifying them based on changes in financial statements. “Cash flow, earnings, everything that will be measured in the top 10% … is the majority of the area that we spend our time in,” Sparrow told MarketWatch in a recent interview.

Its system alerts you which companies are experiencing “significant growth” relative to other stocks, and then looks to see where the growth is coming from. “So we are really looking for organic growth. What are they creating? “

Among the trends of 2021 and beyond that you are betting on is online gambling, leading you to an addition to the portfolio: DraftKings DKNG,
whose shares rose 335% in 2020. The fantasy sports contest and online gambling group went public through a merger with a special-purpose takeover company last April. The shares have gained 27% this year so far.

How much more can investors get from DraftKings? Sparrow pointed to a recent interview with CEO Jason Robins, who said DraftKings mobile sports operations are now located in 12 states from just one, shortly after a long-standing US ban on sports betting was lifted ago. more than two years. The company has led strong growth in 2021, and if its betting operations reach 50 states, there is still a lot of growth to come, he said.

Read: Buy DraftKings and Penn National because the digital game is in its infancy, says Goldman

Sparrow said it’s not just about DraftKings, but other companies like global hospitality and entertainment group MGM MGM,
who are now getting involved in online gambling, with portals and apps for phones. It is “more cost effective to send an application to everyone,” he said.

Your next stock pick is Chegg CHGG,
+ 1.28%,
offering digital and physical textbook rentals, along with online tutoring and other services for students. Sparrow is also a subscriber and reads books to stay current on math and probability for investment analysis.

“So when I get a textbook and I read it and I can’t get the answers, I put the ISBN number and they do it step by step with cards and they have tutors. So I think online education is good and important, “he said, adding that frankly he’s” hooked on the damn thing. “Chegg’s shares are up 138% in 2020 and are up 17% so far. anus.

Read: Chegg’s latest quarterly results

Another action Sparrow likes is the online payment service Square SQ,
+ 3.28%,
whose CEO and President, Jack Dorsey, also runs the Twitter TWTR micro-messaging service,
+ 1.17%.

“What’s cool about Square is that they have point of sale hardware and software to transact for retailers and other merchants, but they are very interested in the cash app,” which means you can send cash to someone via from your phone. , he said. “And that’s a very good trend.”

PayPal PYPL,
+ 0.65%,
with its own cash app, Venmo, is a Square competitor. The Sparrow fund has held Square since 2017, but believes the company is starting to expand, with new services, such as a free stock trading capability added to its Cash app in 2019. Square recently benefited when rival trading app Robinhood restricted some transactions in the market. the awakening of the frenzy by video game retailer GameStop GME,
and users left the Cash app and other places. Square’s shares are up 247% in 2020 and are up 21% so far this year.

Sparrow’s latest stock pick is Chewy CHWY,
+ 1.73%,
that has benefited amid the pandemic as pet adoptions have increased and owners spend more time and money on their animals. The online retailer of pet products saw a 45% increase in third-quarter net sales to nearly $ 2 billion. Chewy stocks are up 284% in 2020 and are up 7% so far this year.

“Not only are they entering more people’s homes on the convenience side, but they are adding more health care-related prescription items to their website,” he said.

Sparrow also weighs on what he sees are some potential blind spots for investors as another year of the pandemic drags on. “The risk is that we will not be able to control the pandemic with the launch of the vaccine,” he said, or that the stimulus programs are not approved.

“So if you get the different strains and the vaccine becomes ineffective, and we go back to the lockout, that’s a big risk,” he said, adding that inflation rearing its ugly head is another risk.

Sparrow is not concerned, however, by a stock market SPX,
+ 0.17%
that continues to escalate against all kinds of headwinds, like the pandemic. “As populations grow and economies grow, it’s natural that businesses will become worth more over time,” he said.

Read: Small-cap stocks are gaining and are here to stay. Why these analysts say it’s bad news for the S&P 500


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