Written by Philip Van Doorn
Buffalo Funds' Nicole Koenitzer explains how she invests in “secular growth trends that last for years”
It's understandable that U.S. investors would focus on the largest technology companies that have driven the S&P 500's strong performance over the past decade. But learning about strategies that give you exposure beyond U.S. large-cap benchmarks can help you reduce the risk of portfolio concentration while expanding your long-term growth opportunities in the stock market.
Nicole Kornitzer has managed the $1 billion Buffalo International Fund since 2009. She is based in Paris. She told MarketWatch that she and Buffalo Funds analysts are focusing on stocks of companies that they expect to benefit from “secular growth trends that could last for years” throughout the economic cycle. Explained how they are selected. The fund is rated 4 stars (out of 5 stars) by Morningstar in the “Large Overseas Growth'' category.
Buffalo International Fund focuses on developed markets outside the U.S., but also has a small amount (less than 10%) of exposure to emerging markets, Koenitzer said.
Trends she continues to follow include automation, digital transformation, artificial intelligence, electric vehicles, power generation, and the global expansion of the middle class. She highlighted some of these themes and biotechnology research related to her important trend of expanding the use of GLP-1 drugs for weight loss and treatment of obesity-related diseases.
Previous articles in this series on diversification strategies beyond the S&P 500 SPX:
The fund has shown strong performance in target stocks that are ripe for other companies. This quality approach to the undervalued parts of the stock market has earned us a 5-star rating. This ETF has outperformed the S&P 500. It is completely different from an index.
Examples of companies benefiting from important global trends
Mr. Koenitzer discussed eight companies related to several business trends.
Expanding e-commerce
MercadoLibre Inc. (MELI) is an e-commerce company based in Uruguay. Kornitzer said the company's e-commerce share in the country is “around 25% to 30%,” but the company is well-positioned, especially in Brazil, where there is “room to maneuver.”
“We have built up logistics in Brazil, so now we can gain a lot of leverage from that,” he said, adding that the company is “the only competitor in Brazil with an extensive vertically integrated logistics network.” he added.
Brazil contributed 52.5% of MercadoLibre's net revenue in 2023, of which 22.4% came from Argentina and 20.6% from Mexico. Kornitzer expects Mexico to move into second place soon. The company's revenue from Brazil grew 34% in 2023, while revenue growth from Argentina was 29.6%. MercadoLibre's Mexico operations had revenue growth of 60.1% in 2023, according to the company's annual 10-K filing with the Securities and Exchange Commission.
MercadoLibre's revenue in 2023 increased 42% from the previous year to $4.3 billion, but operating income decreased from $349 million to $240 million. However, in a letter to shareholders dated Feb. 22, the company said that “excluding one-time charges,” operating income would be $322 million in 2023 after adjustments to add charges related to the prior period. The amount increased from $572 million in 2023. 2022.
Another “obvious advantage” Kornitzer cited about MercadoLibre is the company's lending business. This consists of short-term loans made to sellers selling through the company's e-commerce platform, which gives them “real-time visibility into how their business is doing,” she said.
“If you lend money to a business and your sales aren’t growing, you can immediately manage the risk.”
Kornitzer is enthusiastic about MercadoLibre's growth path over the next few years, but warned that the stock could come under pressure if the company announces spending plans to expand its warehousing and logistics capabilities. The table below shows the expected compound annual growth rate (CAGR) of sales and earnings per share for the companies discussed by Koenitzer. Mercado's projected growth rate for his Libre until 2026 is very high.
Biotechnology and GLP-1
Novo Nordisk A/S (DK:NOVO.B), a GLP-1 drug used for the treatment and weight loss of type 2 diabetes, is owned by a fund focused on developed markets outside the United States. It is clear that this is the intention. This company is in a de facto duopoly with Eli Lilly & Co. (LLY). See the table below for alternative high revenue and EPS estimates.
Another aspect regarding biotechnology is the increasing outsourcing of clinical trials. Within this industry, Kornitzer supports Icon PLC (ICLR), a contract research organization (CLO) and one of the top two or three in the world, she said.
While long-term trends in biotech R&D budgets have been “stable,” early-stage biotech companies have recently suffered from a decline in available venture capital funding due to rising interest rates, Kornister said. But now, she says, “there are signs that things are starting to stabilize and there is enough funding for research.”
Read: Obesity and drugs power couple Novo Nordisk and Eli Lilly still have room to run, analysts say
Japan's digitalization
Kornitzer said Japan lags behind other developed countries in adopting cloud-based technologies to improve efficiency. But now that the Tokyo Stock Exchange is showing improved returns to investors, new moves in this direction could accelerate.
She believes BayCurrent Consulting Co., Ltd. (JP:6532) can “benefit from Japan's digitalization trends.”
“To benefit from new artificial intelligence technology, you need software on the cloud and you need a way to analyze all this data,” she said. She called Bay Current “one of the top purely Japanese consulting firms.”
As Japanese companies come under pressure to improve their performance, “there are early signs that Japanese retail investors are returning to the market,” Koenitzer said. “But we don't see a big push from Japanese institutional investors. We hope that's the next step.”
artificial intelligence
Koenitzer said Taiwan Semiconductor Manufacturing (TSM) is “one of the biggest beneficiaries of AI” because it has “the contract manufacturing capabilities of any company that makes chips.”
Another holding in the fund she discussed is SK Hynix Inc. (KR:000660), which has the highest projected sales CAGR in the table below. He said the stock was starting to look “overvalued” with a price-to-book ratio of 2.3x. However, since he is one of the main producers of high-bandwidth memory installed when the company introduces graphics processing units (GPUs) made by Nvidia Inc. (NVDA) into data centers, he is highly regarded. may be justified.
Koenitzer said SK Hynix has long been a cyclical company. “But we think things will be less cyclical for at least the next four years,” he said.
Another holding in the fund mentioned by Mr. Kornitzer is Japan's Disco Corporation (JP:6146), which has an overwhelming market share in the niche business of “wafer polishing.” However, he said the stock's performance had been so strong that it had become “quite expensive” and he did not recommend buying it at its current price.
The last AI-related business that Mr. Koenitzer mentioned was Shin-Etsu Chemical Co., Ltd. (JP:4063), which is also based in Japan. He described the company as a “stable company” that makes large chips that are in increasing demand thanks to AI-related equipment. Various PVC materials are available.
He said the PVC business is “somewhat cyclical,” but added that Shin-Etsu could easily pivot and ship anywhere demand is strong.
He also called the company “a company that generates strong cash flow.”
Buffalo International Fund's top holdings
Buffalo International Fund held 82 shares as of March 31st. However, the fund only publishes its top holdings 60 days after the end of each quarter. So, here are the top 10 holdings as of December 31st, followed by the other four companies mentioned above. This table includes expected compound annual growth rates based on consensus revenue and earnings per share estimates among analysts surveyed by FactSet. The estimates underlying the growth projections are for the calendar year. In some companies, the fiscal year does not match the calendar.
GFL Environmental Inc. Ticker Country % of the Buffalo International Fund portfolio as of Dec. 31 Three-year estimated sales CAGR through 2026 Three-year estimated EPS CAGR through 2026 Linde PLC LIN U.K. 2.1% 5.3% 10.1% Schneider Electric SE FR:SU France 2.0% 6.5% 11.4% Renesas Electronics Corp. JP:6723 Japan 1.9% 6.7% 9.0% Taiwan Semiconductor Manufacturing Co. ADR TSM Taiwan 1.8% 18.7% 19.9% Novo Nordisk A/S ADR Class B NVO Denmark 1.7% 19.1% 21.7%
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04/18/24 1117ET
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