MW Highly ranked manager who bet on Mag 7 giants looks to these second-order winners from AI
By Barbara Kollmeyer
Critical information for the U.S. trading day
Large-cap growth funds have been in the sweet spot for a few years now, thanks to megacap tech holdings.
Among them is the $13 billion MainStay Winslow Large Cap Growth fund MLRSX, whose retirement account class is rated four out of five stars within Morningstar's "large growth" category. The fund's average annual 5- and 10-year returns are over 14%, with a 35% one-year gain.
But co-portfolio manager Justin Kelly, also CEO and CIO of Winslow Capital Management, knows their work is cut out to find the next winners.
For starters, they remain AI believers, he tells MarketWatch in an interview. "AI is a big game changer for the economy and for the stock market and...if it wasn't for AI in this dramatic capital spending wave that we've been seeing, the economy would be demonstrably worse off," says Kelly.
And while he has faith in the big names, the hunt for up-and-comers is on. "We do think there will be these second and third-order winners from AI, basically companies that are using AI technology, that are not tech companies, to distance themselves from the competition," he said.
Late last year, the fund boosted holdings of surgical robotics company Intuitive Surgical $(ISRG)$ in anticipation of its new robot. The company is using AI technology to add features to that robot - a 10 times improvement in compute power that will give surgeons more real-time feedback while operating, he says.
"We see the innovation enabled by AI and Intuitive Surgical to do two things: one, distance themselves from the competition and two, expand the opportunity for robotic surgery," said Kelly. "We think this company is set up for a tremendous growth cycle over the next three years."
The shares are up 10% this year, after 2023 gain of 27%.
Early this year, the fund bought Trane Technologies $(TT)$, an industrial heating, ventilation and air conditioning company, and crucial AI player.
"This company provides a lot of the commercial cooling systems for these data centers that are going to be built for AI and they're a market share leader," said Kelly. "They have the most advanced systems so they're the most sought after. And we think that data center build out for AI technology is just beginning."
He thinks Trane can grow its business by nearly 20% per year. Shares up 29% so far this year, after a 45% 2023 gain.
Away from AI, the fund this year bought audio music and media streaming company Spotify $(SPOT)$ - "one of those unique products were it is attractive to every consumer on planet Earth." Both Spotify and Chipotle, a long-time holding, "are driving productivity through...better management of their systems."
Chipotle $(CMG)$ has been "retooling their restaurants to drive more throughput through so that they can increase the volume and thus sales per store." The burrito chain has also sidestepped disappointment seen by McDonald's $(MCD)$ and Starbucks $(SBUX)$, which MainStay sold in anticipation of low-end consumer weakness.
It's a "great example of stockpicking basically where the industry isn't doing well, but Chipotle is," he says.
As for top holdings, his biggest conviction plays are Amazon $(AMZN)$ and Microsoft $(MSFT)$, which they've held over a decade. "We think they'll be able to deliver high teens earnings per share growth for the next five years based on AI being the driver," Kelly said, adding that Amazon's new CEO, Andy Jassy, is also seen as more profits focused.
And they have faith in Meta Platforms (META), which is spending 10 times more on its AI infrastructure than Snap's (SNAP) Snapchat or Pinterest $(PINS)$ meaning "advertisers are going to get better returns on a Meta platform than they are on the competition," he said.
Kelly isn't too worried about Nvidia $(NVDA)$, noting demand for its products extends into 2025 and 2026. "And so while certainly we believe there will be a digestion period of all this AI spending, it does not look like it's going to be happening this year. So Nvidia looks like it's still in a good place."
If there's a problem child in the portfolio it's Apple $(AAPL)$, which reports after Thursday's close. He sees the iPhone maker not growing its business and facing stiff China competition.
"What we need to see for us to get more confident to buy more shares is if they could put some AI technology that would make people buy more phones in the future because of a new feature set," he said. Investors may have to wait until after this year for that, but given how cheap Apple shares are that could make it "very, very interesting again," says Kelly.
The markets
Stock futures (ES00) (YM00) (NQ00) are higher as investors digest a higher-for-longer Fed with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y down. The dollar $(USDJPY.FOREX)$ is back above 155 yen, after suspected BOJ intervention.
The buzz
Apple $(AAPL.UK)$ reports after the bell, with Moderna $(MRNA)$, Stanley Black & Decker $(SWK)$ and ConocoPhillips $(COP)$ results released ahead of the open.
Chip maker Qualcomm $(QCOM)$ reported better-than-expected results and shares are up. An underrated AI story?
Used-car retailer Carvana $(CVNA)$ is up 30% on a surprise profit. A weak sales view is hitting real-estate group Zillow (Z). Downbeat sales are also hitting Etsy shares $(ETSY)$, and eBay $(EBAY)$ is off on soft guidance.
Weekly jobless claims, the U.S. trade deficit, productivity and unit-labor costs are due at 8:30 a.m., with factory orders at 10 a.m.
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-Barbara Kollmeyer
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May 02, 2024 06:49 ET (10:49 GMT)
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