Growth stocks haven’t been at the forefront of investors’ minds in the past few years, since the higher interest rates environment has shifted their attention to other areas of the market.
But less favourable conditions haven’t curbed the enthusiasm at Baillie Gifford, whose growth-focused managers still find companies with favourable growth prospects to be excited about, despite the short-term macro headwinds.
Below, four managers from the investment house disclose one stock in their respective portfolios that they think is in a unique position to deliver outstanding results going forward.
Space X
Douglas Brodie, FE fundinfo Alpha Manager of Baillie Gifford’s Edinburgh Worldwide Investment Trust, is “hugely excited” about Elon Musk’s private company, SpaceX.
“It's rare that you come across companies for which you can genuinely say ‘this might be a generation-defining company’, and with SpaceX everything points to that,” he said.
In the past, the “ridiculously prohibitive” costs of getting objects into orbit only allowed national space agencies to be in the sector and the cost of failure was “huge” because of the amounts of money that had to be invested. But SpaceX “bust the whole model” that the industry had to work to, explained Brodie.
“SpaceX puts the emphasis on high-frequency launches with renewable elements to the rockets, and now the dollars spent per kilogramme to get things into orbit keeps falling with each generation of rocket it delivers. So on one hand, it acts as a key enabler for the industry and it is on the right path to becoming the logistics rocket business for space,” the manager said.
“Within that, there will be very interesting commercial opportunities, not only in consumer applications and broadband applications, there’s a lot more you can do with the data from all around the world. It's rare that you'll come across something where the competitive landscape seems so much in its favour.”
Moderna
Kirsty Gibson, co-manager of the Baillie Gifford American fund, likes the integration of the digital and real world that she finds in Moderna.
Performance of stock over 5yrs
Source: Google Finance
Moderna started out by writing software code to cure diseases and operates a software-like development model in biotech where the “software” is mRNA, a molecule that contains instructions for the human body to create the proteins it needs to cure a disease.
The process, which is the same for all products, is to build a platform once and use it many times over, changing only the DNA used at the beginning of the process, which varies depending on the protein they are looking to produce.
“The opportunity is much broader than a single disease, there are plenty of different applications that one could potentially use, and most importantly, it's a programmable platform. The fundamental building blocks of the drug do not change from one disease to the next. Consequently, the more success mRNA has, the more confidence we need to have in its future success in being able to be used for future diseases,” Gibson said.
“But Moderna doesn't just write software for vaccines, it also manufactures these vaccines in-house. Moderna's competitive strength comes from both software and hardware. It's the knowledge of how to code mRNA treatments and the skill set to be able to manufacture them.”
Taiwan Semiconductors
Despite negative sentiment towards this stock, Andrew Stobart, co-manager of the Baillie Gifford Emerging Markets Growth fund, thinks prospects for Taiwan Semiconductor Manufacturing (TSMC) look “as attractive as ever”.
Performance of stock over 5yrs
Source: Google Finance
“We think the semiconductor sector right now is really interesting. Share prices have been weak because demand has been relatively low, inventories have built up and there’s been a sell-off in the sector, including TSMC, over the past few months. But we think the long-term outlook is as attractive as ever,” he said.
“TSMC makes semiconductors for just about every semiconductor design company in the world, so essentially, it doesn't matter where the growth in semiconductors will come from – the company will benefit whether it's high-performance computing, or AI.”
The manager also likes the fact that, from its beginnings in the 1980s, the business focused on one thing only – making semiconductors – and has developed “very strong customer relations, to the extent that it dominates this industry with well over half of the industry's revenues and well over 80 to 90% of the profit of the industry”.
As to why Stobart decided to continue to hold it, he believes that it will continue to grow at about 5% to 10% per year and continue to take market share, so it will grow to over at least 10% to 15% per year in real terms.
“It's a highly profitable business, which is making returns on equity at 30%. Last year, for example, it invested $36bn in capital expenditure and yet it still pays a dividend, equivalent to a 3% dividend yield. So here we just see a business which can continue to compound growth at very high returns.”
Starbucks
Katherine Davidson, co-manager of the Baillie Gifford Sustainable Growth fund, picked Starbucks.
Performance of stock over 5yrs
Source: Google Finance
“I don't think you would expect to see Starbucks in a sustainable fund, but the reason we own it is the work that they do with coffee farmers – not just their own farmers but in the whole industry, as they are the only company that I'm aware of that proactively works with suppliers outside their own network,” she said.
“The company is one of the largest buyer of coffee globally, and if it wants to increase production, then it is going to need security of supply at a reasonable price, so it's in the firm’s best interests for farmers to make a living and not be unduly affected by climate change.”