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Eight stock picks in AI, obesity drugs, e-commerce and other growth areas beyond the S&P 500

By Philip van Doorn

Nicole Kornitzer of Buffalo Funds explains how she invests in 'secular growth trends that can last a number of years'

It is understandable for U.S. investors to be focused on the largest technology companies that have driven such strong performance for the S&P 500 over the past decade. But learning about strategies that give exposure beyond the U.S. large-cap benchmark can help you to lower portfolio-concentration risk while expanding your set of opportunities for long-term growth in the stock market.

Nicole Kornitzer has managed the $1 billion Buffalo International Fund since 2009. She is based in Paris. Speaking to MarketWatch, she explained how she and analysts at Buffalo Funds select stocks of companies they expect to benefit through full business cycles from "secular growth trends that can last a number of years." The fund is rated four stars (out of five) within Morningstar's "Foreign Large Growth" category.

The Buffalo International Fund focuses on developed markets outside the U.S., although it will also have a small amount of exposure (less than 10%) to emerging markets, Kornitzer said.

Trends she has been following include automation, digital transformation, artificial intelligence, electric vehicles, electricity generation and the global expansion of the middle class. She covered several of these themes and biotechnology research as it relates to the important trend of expanding use of GLP-1 medications for weight loss and the treatment of diseases associated with obesity.

Previous stories in this series about strategies for diversifying beyond the S&P 500 SPX:

This fund has outperformed with stocks that are ripe targets for other companiesThis quality approach to a cheap part of the stock market garners a five-star ratingThis ETF is beating the S&P 500 - and it's completely different from the index

Examples of companies benefiting from important global trends

Kornitzer discussed eight companies that are associated with several business trends.

Expanding e-commerce

MercadoLibre Inc., (MELI) is an e-commerce company based in Uruguay. According to Kornitzer, it is well positioned, especially in Brazil, where there is "room to run," even though the company's e-commerce share in that country is "somewhere between 25% and 30%," she said.

"In Brazil they have built up their logistics, so now they can gain a lot of leverage off of that," she said, adding that the company is "the only competitor in Brazil with an extensive logistics network, with vertical integration."

Brazil contributed 52.5% of MercadoLibre's net revenue during 2023, with 22.4% of revenue coming from Argentina and 20.6% from Mexico. Kornitzer expects Mexico to move into the second position soon. The company's revenue from Brazil increased 34% in 2023, while the growth rate for its revenue from Argentina was 29.6%. For its Mexico business, MercadoLibre's 2023 revenue growth rate was 60.1%, according to the company's annual 10-K filing with the Securities and Exchange Commission.

During 2023, MercadoLibre's revenue increased 42% from a year earlier to $4.3 billion, while its income from operations declined to $240 million from $349 million. However, in its letter to shareholders on Feb. 22., the company said that "excluding one-off expenses," and with adjustments to add expenses tied to prior periods, income from operations had increased to $572 million in 2023 from $322 million in 2022.

Another "clear advantage" cited by Kornitzer for MercadoLibre is the company's lending business. This consists of short-term loans made to merchants who sell through its e-commerce platform, "with real-time views of how their businesses are doing," she said.

"If they lend to a business and see sales are not expanding, they can quickly manage their risk."

Kornitzer is enthusiastic about MercadoLibre's growth path over the next several years, but she warned that when the company announces spending initiatives to expand warehousing and logistics capability, there can be pressure on the stock. On the table below are projected compound annual growth rates (CAGR) for revenue and earnings per share for companies Kornitzer discussed. The expected growth rates for Mercado Libre through 2026 are very high.

Biotechnology and GLP-1

Novo Nordisk A/S (DK:NOVO.B) is the obvious play on GLP-1 medication being used to treat Type 2 diabetes and for weight loss to be held by a fund focused on developed markets outside the U.S., considering that for now this company is in a virtual duopoly with Eli Lilly & Co. (LLY). Take a look at the table below for another pair of high projections for sales and EPS.

Another angle on biotechnology is the increasing outsourcing of clinical trials. Within this industry, Kornitzer favors Icon PLC (ICLR), which is a contract-research organization, or CLO, and one of the top two or three globally, she said.

While the long-term trend for research and development budgets for biotechnology has been "stable," more recently early-stage biotech companies have suffered from a decline in available venture-capital money because of higher interest rates, Kornitzer said. But now "there are signs it is beginning to stabilize and that there is enough money out there going into research," she said.

Read: Obesity-drug power couple Novo Nordisk and Eli Lilly still have room to run, analysts say

Digitization in Japan

Japan has lagged other developed economies in the adoption of cloud-based technology to improve efficiency, Kornitzer said. But a new movement in this direction may accelerate at a time when the Tokyo Stock Exchange is showing improved returns for investors.

She believes BayCurrent Consulting Inc. (JP:6532) "can benefit from the trend in Japan to digitalize."

"To benefit from new artificial intelligence technology, you need to have software in the cloud and a way to do analytics with all this data," she said. She called BayCurrent "one of the top all-Japanese consulting firms."

With pressure on Japanese companies to improve their performance, "there are early signs retail investors in Japan are coming back into the market," Kornitzer said. "But we have not seen a big push by institutional Japanese investors. We hope that will be the next step.

Artificial intelligence

Kornitzer called Taiwan Semiconductor Manufacturing Co. (TSM) "one of the biggest beneficiaries of AI," because it has "the ability to contract-manufacture for all the companies making chips."

Another holding of the fund she discussed is SK Hynix Inc. (KR:000660), which has the highest projected sales CAGR on the table below. She said the stock was starting to appear "pricey," based on its price-to-book valuation of 2.3. Then again, during a period in which the company is one of the main producers for high-bandwidth memory being installed as data centers implement graphics processing units (GPU) made by Nvidia Corp. (NVDA), the high valuation might be justified.

Kornitzer said that over the long haul, SK Hynix had been a cyclical company. "But we think it will be somewhat not-so-cyclical over the next four years at least," she said.

Another holding of the fund Kornitzer cited was Disco Corp. (JP:6146) of Japan, which has a dominant market share in the niche business of "polishing wafers." But she said the stock had performed so well that it had become "quite expensive," and that she would not recommend buying it at the current price.

The last AI play Kornitzer mentioned was "Shin-Etsu Chemical Co. (JP:4063), which is also based in Japan. She called this company "a stable business" making large chips for which demand has increased because of AI-related equipment deployment, and various PVC materials.

She described the PVC business as "a bit cyclical," but also said Shin-Etsu could easily pivot and ship anywhere demand was strong.

She also called the company a "strong cash-flow generator."

Top holdings of the Buffalo International Fund

The Buffalo International Fund held 82 stocks as of March 31. But the fund only discloses its top holdings 60 days after the end of each quarter. So here are its top 10 holdings as of Dec. 31, followed by four other companies discussed above. The table includes projected compound annual growth rates based on consensus revenue and earnings-per-share estimates among analysts polled by FactSet. The estimates underlying the growth projections are for calendar years; some of the companies have fiscal years that don't 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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04-20-24 0645ET

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