US Markets Loading… H M S
Premium
Fund manager Kimberly Scott sees value in mid caps while interest rates are elevated. Kimberly Scott, Macquarie Asset Management This story is available exclusively to Insider subscribers. Become an Insider and start reading now. Lofty interest rates are a once-in-a-generation headache for investors, according to Kimberly Scott. The mid-cap growth fund manager shared what qualities she’s looking for in stocks. Here are six companies that can weather the storm of restrictive financial conditions. Forget the financial crisis and the start of the pandemic — right now is the toughest investing backdrop that Kimberly Scott said she’s faced in over two decades of managing money.
“We think it’s the biggest challenge to equity investing that we’ve seen in 20 years,” Scott, who runs the Delaware Ivy Mid Cap Growth Fund (WMGAX), said of today’s interest rate environment.
Scott continued: “It’s impacting the economy, it’s impacting alternative investors’ willingness, VC money’s willingness to fund things, but it is really impacting the substitutability of returns for equities.”
Interest rates skyrocketed to the highest level in 16 years in response to historically high inflation, which has weighed on Scott’s returns recently. However, the mid-cap growth fund she’s managed since 2001 is still a top-7% performer in the last 15 years, according to Morningstar.
Tight financial conditions discourage spending and incentivize saving, which tends to hurt economic growth and, by extension, corporate earnings. The Federal Reserve is trying to engineer a slowdown to put a lid on price growth, which can wreak havoc if left unchecked.
There’s ‘magic’ to be found in mid-cap growthBut while elevated interest rates aren’t kind to stocks, Scott still sees opportunities in many mid-sized companies. She made the case for the group earlier this year, telling Insider that mid caps often grow faster than large caps but are less risky than smaller firms.
“While this group doesn’t outperform all the time, it tends to provide strong risk-adjusted returns perennially over rolling market cycles,” Scott recently said of mid-caps. “And so we’re always happy to lean into them.”
Within mid caps, Scott tends to tilt toward growth-focused companies, specifically those with sound business models that are profitable and have abundant cash flow. Instead of investing in so-called “bleeding edge” growth stocks, Scott said she prefers steady, reliable compounders.
To be strong investments, companies must also demonstrate an ability to hold up in any market environment, the fund manager said. While few firms are immune from all economic challenges, Scott said there are many high-quality companies that can continue to execute in a recession, which some market pundits warn is still ahead.
“An equity investor has to really be able to deliver something that is going to give you more than a 5% return with less volatility, more durability,” Scott said. “And it’s possible to find many of these names in this space. So I think that’s part of the magic of midcap — there’s something for everybody in there.”
6 stocks to target nowAfter sharing what qualities she’s looking for in stocks, Scott listed six companies she’s eyeing — four of which are among the top-10 holdings in her Delaware Ivy Mid Cap Growth Fund.
Those six stocks are below, along with the ticker, market capitalization, price-to-earnings (P/E) ratio, sector, industry, and a lightly edited version of Scott’s thesis for each.
1. The Trade Desk
Markets Insider Ticker: TTD
Market cap: $39.1B
P/E ratio: 322.1x
Sector and industry: Information Technology; Software
Thesis: “Trade Desk is a remarkable company in terms of the service that it’s delivering to publishers and advertisers. It’s not a super young company, but it’s not that old. It has significant revenue and very, very strong cash flows. It has a business model that returns great margins and great cash flow for investors, and it’s growing in the 30%+ range.
“That one’s more of a leading-edge grower, which probably will graduate to a compounder at some point. But that’s the type of higher-grower, strong business model, strong balance sheet name that we would focus on from the standpoint of just quality growth in this environment.”
2. MSCI
Markets Insider Ticker: MSCI
Market cap: $42.9B
P/E ratio: 47.6x
Sector and industry: Financial Services; Financial Data & Stock Exchanges
Thesis: “Here, you have a company that is a bigger mid cap, but you have a business-service business model that’s a pretty decent compounder where they just grow at a mid- to high-single-digit rate. They accrete margins over time because they are always running their business better, and it’s a scale business. Those are the types of businesses that investors should probably be looking for.”
3. Microchip Technology
Markets Insider Ticker: MCHP
Market cap: $44.9B
P/E ratio: 19.1x
Sector and industry: Information Technology; Semiconductors
Thesis: “It’s like the utility player. They’re just delivering microcontrollers to almost every industry, but they have a good focus on aerospace and defense, industrials, consumers, and communications.
“Over many years, they’ve consolidated some of these microcontroller businesses and just deliver a lot of chips that make almost everything we do and use, run.”
4. Trex
Markets Insider Ticker: TREX
Market cap: $7.7B
P/E ratio: 54.5x
Sector and industry: Industrials; Building Products & Equipment
Thesis: “Trex has been through a downturn — the grower effect of the pandemic. But here, you have a company that’s just in that compounder bucket that is really changing an industry. That’s selling composite decking. People don’t want to do all the maintenance and replacement on their decks all the time, so they’re willing to pay more money.
“They’re a well run company, low to no debt, good cash flow. And as they come out of this grow-over from the pandemic demand, we expect that they’ll continue to grow nicely and continue to serve that market. It’s got a big addressable market.”
6. Pinterest
Markets Insider Ticker: PINS
Market cap: $18.4B
P/E ratio: 228.9x
Sector and industry: Communication Services; Internet Content & Information
Thesis: “The advertising environment hasn’t been great, and they’re in transition — the management team has been there for about a year. But yes, we still really like this.
“We see the users starting to grow again, and their ability to monetize that user base is increasing because of some of their internal efforts that they’re doing with the way that they’re developing the site. Amazon has an agreement to do more advertising on the site.
“So I think what we need here for this to start to hum a little bit better is probably just an improvement in the macro environment, which will lead to more advertising dollars being spent and some proof from the Pinterest returns on investment for the advertisers that it is delivering for them ad levels that are significant relative to all the other options.”
Read next
Receive a selection of our best stories daily based on your reading preferences.
Investing Stocks Stock Market More…
Read next