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Staying one step ahead of the COVID-19 pandemic, at least when it comes to stocks, paid off for fund manager Gerald Sparrow last year. For 2021, he hopes online play, education, and pets are where the stock magic lies.
Sparrow manages the Sparrow Growth Fund SGNFX,
a $ 97 million midcap fund that was in the top 4% of its category last year, with a return of 98%, according to Morningstar. The fund, which has averaged 37% annual returns over five years and 48% over three years, had $ 31 million under management when MarketWatch spoke to Sparrow in June 2020.
Also read: Strategy to buy ‘America’s fastest growing companies’ pays off for this investor in 2020
At the time, he was advocating Snap SNAP,
– parent of the Snapchat messaging app – Carvana CVNA online car salesman,
and Roku ROKU streaming media player,
These companies, with respective 2020 gains of around 200%, 160%, and 147%, were all pandemic games that boosted the growth fund’s returns.
Sparrow’s methodology is to monitor US stocks of all sizes and categories and rank them based on changes in financial statements. “Cash flow, revenue, anything that will measure in the top 10%… is the bulk of the area we spend our time in,” Sparrow told MarketWatch in a recent interview.
His system tells him which companies are showing “significant growth” relative to other stocks, and then he looks to see where the growth is coming from. “So we’re really looking for organic growth. What are they creating? “
Among the trends for 2021 and beyond that he relies on is online gaming, which brings him to a wallet addition – DraftKings DKNG,
whose shares increased by 335% in 2020. The fantasy sports competition and online betting group were floated on the stock exchange through a merger with a specialist acquisition company last April. Shares have gained 27% this year so far.
How much more can investors withdraw from DraftKings? Sparrow referred to a recent interview with chief executive Jason Robins, who said DraftKings’ mobile sports operations were now in 12 states from one, shortly after a long-standing sports betting ban in the United States was canceled over two years ago. The company has guided for strong growth in 2021, and if its betting operations reach 50 states, there is still plenty of growth to come, he said.
Read: Buy DraftKings and Penn National because digital play is early in the innings, says Goldman
Sparrow said it wasn’t just DraftKings, but other companies like the global hospitality and entertainment group MGM MGM,
who are now involved in online gambling, with portals and phone apps. It is “more cost effective to send an app to everyone,” he said.
His next stock pick is Chegg CHGG,
which offers digital and physical textbook rentals, as well as online tutoring and other services for students. Sparrow is also a subscriber, reading books to stay up to date on math and probability for investment analysis.
“So when I get a textbook and read it and can’t get the answers, I put the ISBN number in and they do it step by step with flashcards and they have tutors. So I think online education is good and important, ”he said, adding that he was frankly“ addicted to the hell stuff ”. Chegg shares have climbed 138% in 2020 and 17% so far this year.
Read: Chegg’s most recent quarterly results
Sparrow also appreciates the Square SQ online payment service,
whose CEO and Chairman Jack Dorsey also heads the Twitter paging service TWTR,
“What’s interesting about Square is that they have point-of-sale hardware and software to do transactions for retailers and other merchants, but they’re very interested in the payment app,” which means you can just send money to someone through their phone, he said. “And that’s a really good trend.”
PayPal PYPL,
with its own payment application Venmo, is a competitor of Square. Sparrow’s fund has owned Square since 2017, but believes the company is starting to diversify, with new services, such as free stock trading capability added to its Cash app in 2019. Square has recently benefited from the Rival trading app Robinhood has restricted some trading in the aftermath of the frenzy on video game retailer GameStop GME,
and users switched to the Cash app and elsewhere. Square shares have jumped 247% in 2020 and are up 21% so far this year.
Sparrow’s last stock pick is Chewy CHWY,
who has benefited from the pandemic as pet adoptions have increased and owners are spending more time and money on their pets. The online pet retailer posted a 45% jump in third-quarter net sales to nearly $ 2 billion. Chewy shares gained 284% in 2020 and are up 7% so far this year.
“Not only are they entering more people’s homes for the convenience, but they are adding more prescription health care related articles to their website,” he said.
Sparrow is also weighing in on what he sees as potential blind spots for investors as another pandemic year continues. “The risk is that we do not get the pandemic under control with the deployment of the vaccine,” he said, or that the stimulus programs will not be approved.
“So if you get the different strains, and the vaccine becomes ineffective, and we go back to the lockdown, that’s a big risk,” he said, adding that the inflation was again riding his ugly head is another risk.
Sparrow doesn’t worry, however, about a stock market SPX,
which continues to climb against all kinds of headwinds, like the pandemic. “As the population grows and economies grow, it’s only natural that businesses are worth more over time,” he said.
Read: Small cap stocks are winning and are here to stay. Why these analysts say it’s bad news for the S&P 500
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