Market

After winning with ‘disruptive’ stocks, this five-star manager has a few more ideas to share

The world is about to step out of a dark hole and into the bright sunshine, so investors should drop the anxiety already.

That is the message from Alexander Ely, chief investment officer of U.S. equity growth at Macquarie Investment Management. “The economy is reopening. It’s doing great. We’re coming out of a pandemic,” he told MarketWatch in a recent interview. “It’s going to be awesome.”

It appears some investors are thinking along the same lines, as value and cyclical stocks take off in anticipation of a recovery from the deadly COVID-19 pandemic that has rocked the world for a year. And smaller companies, cogs in the wheels of the economy, have also been rising, with the Russell 2000 benchmark
RUT,
-1.72%

up 18% so far this year.

“Smaller companies — and midcaps to an extent, as well — are more levered to an expansion in the markets. And that’s why we believe smaller-cap companies will do better,” said Ely. He focuses on what he calls “disruptive” stocks — shares of companies, that is, which offer a “better, cheaper, faster way of doing things.”

Also: Seven stock picks from a five-star money manager’s ‘disruptive’ portfolio

And Ely appears to have a knack for picking those stocks. Ad-tech group Trade Desk
TTD,
+1.41%

and mobile-payments processor Square
SQ,
-3.13%
,
two companies he highlighted last year in a conversation with MarketWatch, returned over 200% each last year. His five-star-rated fund, Delaware Smid Cap Growth
DFCIX,
-1.90%

has had average annual returns of 34% over the past three years and 28% over five years. The fund — the “smid” in its name refers to small and midcap — has been in the top performance quartile of the “midcap growth” peer group for 15 years, according to Morningstar.

Headed into the pandemic, Ely said it was best to own companies involving crowds or a recovery. “And now that we’re coming back out of it, there’s a couple of areas that we think have particular strengths,” he said.

His first pick is Pacira BioSciences
PCRX,
-1.34%
,
a maker of non-opioid local anesthesia that plays into the dramatic rebound in medical procedures he sees coming. Knee replacements and similar procedures had been increasing 2% to 4% every year for about 40 years, apart from a flat year between 2008 and 2009. But they fell 15% last year as people avoided hospitals because of COVID-19, noted Ely.

“We see these coming back. You can’t put off getting your knee done, or your ankle done, or your hip done forever,” he said. Pacira’s products will cut the risk of an opioid addiction, he adds, pointing to data showing 40% of people who end up addicted to opioids got there after surgery.

While opiates have been popular because they’re cheap and get the job done, the playing field for companies like Pacira has been leveled thanks to a bipartisan opiates support bill of a couple of years ago that subsidizes non-opioid anesthesia, he noted.

His next pick taps into something everyone is looking for — companies levered to consumers or consumer interaction. “I have kids in their 20s, late teens — they can’t wait to get back out there and go to an event, go back to the gym, go to restaurants, travel, what have you,” he said.

That leads him to stocks like that of the ride-hailing service Lyft
LYFT,
-4.05%
,
which he said has been getting costs under control and is specifically leveraged to helping consumers return to those activities. Lyft and rival Uber Technologies
UBER,
-2.23%
,
which Macquarie owns in larger portfolios, have both “shirked money-losing units, so they’re better prepared to show profits this year,” he said.

He also owns gym chain Planet Fitness
PLNT,
-2.19%
.
“I think after riding a bike indoors or what-not for about a year, people are going to want to get back out there,” he said. “Planet Fitness is the largest by far, a clear leader in the value proposition growth area.”

Ely said he had been watching to see when Planet Fitness shares would start outperforming Peloton Interactive
PTON,
-4.24%
.
This is now happening, he observed, with the gym chain up 4% in 2021 and the maker of high-end home exercise equipment down 22%.

Planet Fitness has “a lot of upside, and fundamentals should improve significantly as we reopen over the next one month, two months, three months,” he said.

Ely also owns Progyny
PGNY,
+0.42%
,
calling it “one of the fastest-growing healthcare companies out there.” Progyny is a fertility benefits provider for companies, with big Silicon Valley names such as Microsoft
MSFT,
+1.24%

and Facebook
FB,
+2.02%

on its books.

“There’s a bunch of trends at play here. First off, people are having babies when they’re older. In general, people are having more trouble having babies just flat out. And more and more corporations want to show that they care, and want to help employees in areas that they can. This is a terrific benefit for people to sign up for,” he said.

Many may have discovered during the pandemic problems with conceiving children, and may be ready to seek that treatment. Progyny did an initial public offering last January, went through the pandemic and did well, but then investors got rattled by some disappointment with revenue, Ely said.

“There’s nothing wrong with the business,” he said. “They were just being conservative going into the year, which every company does.”

Read: How these teens are having fun in today’s stock market, and, for the most part, making money

Ely reiterated the importance of investing early in an economic cycle, set to get kick-started by the fiscal stimulus package signed into law by U.S. President Joe Biden last week. “Right now, we are seven to eight months into a new economic cycle,” he said. Previous bull markets have lasted eight to nine years on average, and equities, notably shares of small companies with leverage in an improving economy, tend to perform better, he added.

“The biggest risk to investors out there right now is not taking risk, [or being] blinded by these stories that the world isn’t going to be great,” said Ely. “It’s going to be great, [and] humanity is going to come through this drawdown in a terrific spot.”

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