Five Qualities of Stable Growth Stocks

Five Qualities of Stable Growth Stocks

MarketWatch spoke to fund manager Chris Armbruster, whose Virtus fund invests in growth stocks. The investor singled out the characteristics of companies whose

What to look out for

Technology stocks have been falling in recent months on fears of rising interest rates. A higher rate forces investors to overestimate the expected cash flows of companies, and with it the value of their shares.

According to Armbruster, the impact of the rate on technology companies is exaggerated: “It does not matter if they raise the rate to 1 or 2.5%. This will not affect the ability to grow, unless there is a recession. We've had interest rate hike cycles before, and the best tech companies have grown during those periods."

The Virtus CEO, who invests in growth stocks like SiteOne, MercadoLibre and Paycom, says good tech companies must have certain qualities. Here are five of them.

High switching costs.

First of all, this is a characteristic of software development companies. It can be difficult for clients of such companies, especially corporate ones, to refuse any software after its implementation. And moving to competitors takes time and money.

According to Armbruster, a good software development company must update its product regularly to retain customers. As an example, he cited Workday - financial and personnel management, Datadog - server and database monitoring, and Okta - identification and access.

Scale advantage.

Large companies can reduce costs due to their size. An obvious example is Amazon. Less obvious is SiteOne. It is a wholesale supplier of landscaping products: irrigation systems, outdoor lighting, measuring instruments, fertilizers, seeds and more.

“SiteOne is five times the size of the next biggest player. This scale allows them to buy materials at a lower price and meet demand better than local players. All this gives them the opportunity to create a digital ordering and delivery service that small companies cannot afford,” said Armbruster.

Strong brand.

A well-known brand allows companies to set their own prices and reduce advertising costs. Here Armbruster cites Monster Beverage as an example. In his opinion, Coca-Cola and PepsiCo presented good lines of energy drinks, but a strong brand helped Monster Beverage to defend its market share.

Differentiated model.

“The term 'differentiated' is hard to define, but you'll understand when you see it. New York Signature Bank looks like just another bank. But if you look closely, you'll notice something else.

Signature is not growing through acquisitions like a typical regional bank, but by attracting top banking talent. He pays employees based on their performance. The bank motivates the staff, and this creates highly productive teams. This is a very differentiated model,” said Armbruster.

Network effect.

According to the manager, the more people use the service, the stronger it becomes. For example, this is the MercadoLibre marketplace. Like Amazon, the site becomes more attractive to investors as the number of buyers and sellers grows.