If you're looking to diversify your stock portfolio, you might consider the mid-cap growth sector.
We recently spoke with a mutual fund manager in that area: Chris Retzler, co-manager of Needham Growth Fund. (NEGX) which has $225 million in assets.
The fund has recorded annualized total returns of 39.16% in the last 12 months, 8.03% in three years, 18.75% in five years and 11.93% in 10 years. That handily beat the S&P Midcap 400 Index during all of those periods.
Retzler says mid-cap stocks are more mature than small-cap stocks and provide diversification from large-cap stocks. And growth stocks could be headed for a rebound if interest rates fall, he says.
Among the fund's favorite sectors are technology, healthcare, industrial, aerospace and defense. Here's what Retzler had to say, including his stock picks.
TheStreet.com: What is your investment philosophy?
Retzler: It is growth at a reasonable price. We try to take advantage of the dislocations of companies with good management, technological moats and long production and service cycles.
Our analysis is bottom-up with an eye toward industry trends that we believe can last over the long term. We try to be long-term investors. We have names that have been with us for five years and 20 years.
Needham/The Street
TheStreet.com: What is the appeal of mid-cap stocks?
Retzler: Mid-cap companies typically have multiple products and services, while small-cap companies typically do not. Mid-cap companies have moved beyond the initial construction stage.
Small businesses have more need for capital markets. And those markets are becoming more selective in accepting companies as zero interest rates have disappeared. It's a struggle for small caps.
Mid-cap companies have more opportunities to access capital markets when they need them.
As for large cap companies, we like to find companies that are not household names but can add value for investors. We can find (returns) away from large cap companies.
Related: Billion-dollar fund manager reveals three mid-cap stock picks
TheStreet.com: What do you like about growth stocks?
Retzler: Mid-cap growth companies suffered from the effects of the Covid hangover over the past few years. Supply chains and inventories were a problem. Certain areas moved forward during the pandemic.
The higher cost of capital has put pressure on companies with more leverage. But we are near the peak of rising interest rates. The Federal Reserve is likely to cut rates later this year or next. That will disproportionately benefit growing companies. Growth stock valuations should improve.
TheStreet.com: What industries and market themes do you like?
Retzler: In general, we have a strong allocation to technology, such as semiconductors and capital goods for them. (The United States and other countries are increasing their semiconductor production capacity.)
The fund manager buys and sells:
- Cathie Wood Buys $26 Million in Distressed tech stocks
- Notable Wall Street bear changes S&P 500 forecast after record rally
- Druckenmiller predicted Nvidia rebound; now you have a new goal
There are positive long-term trends, including artificial intelligence, automation and data processing.
We like special materials, such as those used in semiconductor manufacturing and the lasers that help drive technological advances.
For ai, of course, there are the Magnificent 7 (Alphabet, amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla). But we look at what's tangential to those businesses as ai grows. What are the applications?
This extends to software companies and application makers. Also, how does ai benefit users? The markets are trying to determine who the winners and losers are. ai is the next big trend for society.
We also like healthcare. Innovation continues, with new drug trials and processes. Other strong areas for us are industrial, aerospace and defense.
Related: Veteran Fund Manager Reveals Three Growth stocks With Growth Potential
TheStreet.com: Are there any areas you avoid?
Retzler: You don't see much finance, utilities or real estate in the background. We have nothing against them, but they are more valuable names than growth at a reasonable price.
TheStreet.com: Can you talk about three of your favorite stocks?
Retzler:
1. Fisher Scientific Thermos (TMO) , the giant supplier of scientific equipment. It has multiple products and services and a global presence. It focuses on a variety of industries and technologies. It is well managed by its management team.
2. Super microcomputer (SMCI) , a server technology services provider. It's been a big winner for us (a 250% return last year alone). It is a commitment to the construction of data centers and services.
There is a long-term opportunity to deploy more servers as chips continue to be developed. It's an evolving industry for ai and data center construction. SMCI should be a beneficiary.
3. Nlight (THE R) . There is a huge opportunity for them to assist the military as it continues to modernize its assets. Their lasers help reduce the costs of weapons that defend against incoming artillery. They can be used in defensive maneuvers to protect allies.
Related: A veteran fund manager picks his favorite stocks for 2024
