Equity Outlook  |  Q3 2019

Durable themes with room to grow

Richard E. Bodzy, Portfolio Manager, Putnam Growth Opportunities Fund

Durable themes with room to grow

Looking back on a multiyear period of strong performance from growth stocks, it is natural to question whether this group of stocks still has room to outperform. The answer is yes, though there are some important distinctions to be made. To this point, our priority is finding durable long-term growth ideas with multi-year drivers. We conduct rigorous front-end analysis that is based on growth prospects over time periods of years rather than months or quarters. We also identify companies that have demonstrated above-market growth rates and have the potential to continue delivering that level of growth for years to come. At a high level, the companies we target tend to be in areas of the market that are less vulnerable to fluctuations in the economy. In fact, we explicitly factor in prior-cycle downside capture as part of our investment criteria.

"We research key trends or problems that businesses are working to address."

Given this framework, a logical question would be: How does one determine the longevity of a company's growth potential? Our approach includes a thematic overlay. We identify key themes — trends or problems, for example — that businesses are working to address. We constantly monitor the themes to determine which companies are poised to benefit. Recent themes include personalized medicine, the rise of robotics, the humanization of pets, cloud infrastructure and software, health-care inflation, and the transition from cash and credit cards to digital wallets.

Investment opportunities emerge from an array of themes

Theme: The humanization of pets
Company: IDEXX Laboratories (IDXX)

Pets have become an increasingly important part of the typical household, receiving the same level of attention, care, and preservation of health as human family members. Demand for quality pet care is strong and growing, and IDEXX Laboratories is a leader in capitalizing on this trend. IDEXX is an animal health-care company specializing in diagnostic testing, including in-office testing kits for veterinarians. IDEXX has a 70% market share of point-of-care veterinary facilities, and has been growing its earnings at double-digit rates. The company's testing kits, components, and supplies — many of which are disposable items — generate a healthy level of recurring revenue. We believe the double-digit growth rates should continue for many years to come regardless of variations in the underlying economy.

Theme: Digital wallets and e-commerce
Company: PayPal Holdings (PYPL)

The rapidly growing use of digital transactions is a key theme in our research. Among our top investments is PayPal Holdings, which enables businesses and individuals to electronically transfer money. In addition to the growing number of PayPal customer accounts, we are optimistic about the potential to monetize Venmo, the company's app that provides peer-to-peer payments. User growth has been very strong across the platform, particularly among younger consumers. With 40 million existing accounts, PayPal has the potential to tap into that user base with a number of additional offerings, including innovative banking services. PayPal's agnostic platform — it is not reliant on a limited ecosystem like Apple's iPhone — puts it in a strong position to keep adding users and services to its existing base, which should help power its future growth.

As of 3/31/19, IDEXX represented 1.33% of Putnam Growth Opportunities Fund assets, and PayPal represented 3.17% of fund assets.

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