Here’s how to find the hidden gems in mid-cap stocks according to investor Gerard Sullivan.
Gerard Sullivan had not initially planned to become a portfolio manager.
Originally, he envisioned a career as a stock analyst. But as the wealth management industry exploded in the 1980s, he found himself drawn into the industry, working with some of the industry’s most illustrious names.
It was under the guidance of legendary investor Peter Lynch that Sullivan developed the edge that served him in his career.
In 1985, during a summer job at Fidelity, Lynch assigned Sullivan what he saw as one of his most challenging tasks: tracking European chemical companies. It was a feat that Sullivan said was simply "not done" at the time. It was a time when there were few American depositary receipts, or ADRs, and no investor relations pages. To identify opportunities, the Columbia Business School graduate had to navigate language differences and accounting and reporting regulations.
At the time of presenting his findings, Sullivan felt he had not made much progress on his questions. However, from his assessments, he had learned that European chemical companies, which he said were trading at two or three times earnings, were much cheaper than their U.S. counterparts at the time, for companies that were essentially in the same markets.
By the end of that summer, six of his stock picks finished among the Magellan Fund’s top 20 names. Four finished in the top 10, Sullivan said. Even better, he said they all doubled in the next six months on the foreign exchange market. The fund — one of the best-known actively managed mutual funds that exploded under Lynch’s leadership — liquidated names before they reached their peak, he said.
Today, Sullivan manages the Putnam Investments Core Equity Fund (PMYYX), a multicap fund with $4.4 billion in assets that he started in 2010. Longtime ally and friend Arthur Yeager joined as co-manager in 2017.
PMYYX invests across all market cap styles and sizes, targeting ideas in both growth and value stocks. It’s an approach that has given investors the flexibility to pursue ideas where they suspect they have an edge, across a wide range of assets.
Their process served the two managers well. In December, PMYYX was ranked in the top 1% of its peers, according to Morningstar. It is in the top quartile of funds this year, as well as in the top 6% of funds over a 10-year time frame, with an approximate annual gain of 13%.
Sullivan likes to invest in undervalued stocks where he expects the downside to be limited and a little good news will push the stock price up.
This may include companies emerging from bankruptcy. One example cited by his partner Yeager was Pacific Gas & Electric, a California-based utility company that filed for bankruptcy in 2019 after facing claims over deadly wildfires in 2017 and 2018.
The stock fell, but Sullivan kept in mind some of the company’s advantages, including a trust fund set up by the state to manage liabilities and a strong management team from the Michigan-based utility company, CMS Energy , which Sullivan called "the best utility on Earth." After all, he said, "people need electricity" in the state of California. PG&E emerged from bankruptcy in 2020, and the stock rose more than 14% that year.
It also aims to get to know the management teams of lesser-known companies ready to debut on the stock market. Even if he doesn’t invest with them from the start, initial research can help him understand whether he should jump in if the stock drops later, as often happens with newly listed companies, according to Sullivan.
PMYYX holds more than 100 companies. Most of the top 10 holdings are in the "Magnificent Seven" companies, an allocation that has helped the fund perform well this year. After all, Nvidia, the third-largest holding in the fund, is up about 80% in just over three months. (Tesla is the only one of the Magnificent Seven noticeably absent from the top 10 entries.)
But Sullivan said he holds megacap tech names with a light hand. While he considers some more overvalued than others, he noted that it’s hard to ignore the tech giants that have become so large in the S&P 500’s market capitalization that they are still growing while also showing signs of maturity.
Today, Sullivan said the attraction is more in smaller companies.
However, he is avoiding troubled companies, favoring names that are making money and appear to be in protected markets.
Last year, the investor began building positions in small- and mid-cap companies he thought were attractive. PMYYX has a 0.11% position in Pinterest, the image-sharing platform that rose more than 52% last year, though it is down more than 11% in 2024.
Another is LPL Financial, the financial advisory platform that gained more than 5% last year and more than 14% this year. PMYYX has an allocation of 0.15%, as of March.
One of the larger companies that Sullivan has bought recently is FedEx which he said is on the right track with new management looking to combine the air and ground express sectors.
CEO Rajesh Subramaniam will take over from the company’s founder in 2022. Sullivan also noted that the transportation stock remains attractive, compared to its rivals like UPS, limiting the downside. And, it’s about to wrap up an investment cycle that could boost free cash flow, he said. The portfolio has a 0.22% weight in FedEx, as of March.
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The information and considerations in this article should not be used as the sole or primary basis for making investment decisions. The reader maintains full freedom in his own investment choices and full responsibility in making them, since he alone knows his risk propensity and his time horizon. The information contained in the article is provided for informational purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public for savings.|
Original article published on Money.it Italy 2024-05-11 07:09:00. Original title: Mid cap, ecco le aziende su cui investire ora
