By Michael Brush
One of the great things about writing for MarketWatch is that I regularly get to interview smart people about the stock market to learn key investing lessons.
How do I know who the smart players are? After all, the stock market attracts a lot of hucksters, grifters and mediocre people.
For mutual fund managers, I apply what I call the Morningstar IQ test — outperformance over three and five years. This is a major distinction because beating the market is tough. And this time frame is long enough to assure it’s not just a fluke.
By this measure, Alexander Ely, who manages the Delaware Smid Cap Growth Fund /zigman2/quotes/200336916/realtime DFCIX -1.86% , would belong in the Morningstar market “mensa” club, if there were one. (“Smid” is short for small- and mid-cap.)
A graduate in economics from the University of New Hampshire (he didn’t attend business school), Ely credits his early interest in stocks to his love of numbers.
“When you open up a section of the newspaper and it is all numbers, that is pretty exciting,” he says.
Ely got his first real-life taste of the stock market working as a clerk at the Boston Stock Exchange in the late 1980s, while in college. He didn’t like the frenetic pace, so he angled for a career in money management instead.
His investors should be thankful. Ely beats his Morningstar mid-cap growth category and Russell mid-cap growth index by about 18 percentage points and 10 percentage points, annualized, over the past three and five years. That’s rare. Likewise, he crushes the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.54% , the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.97% and Nasdaq /zigman2/quotes/210598365/realtime COMP -2.41% .
Ely’s first personal stock purchase was the contact lens company Bausch + Lomb (now part of Bausch Health Cos. /zigman2/quotes/207248436/composite BHC +0.33% ). The stock did well for him, and it is a good setup for our first lesson.
When Ely bought Bausch + Lomb in the early 1980s it was a leader in contact lenses, an emerging trend in eye care. Bausch + Lomb was disrupting eyewear because it found a way to do something better, faster and cheaper. That’s Ely’s definition of a disruptive company.
Besides superior stock performance, a great thing about disruptive companies is that you can simply hold them for a long time because external events like pandemics and recessions don’t really matter. The 1980s and 1990s brought recessions, market meltdowns, war in the Middle East and other crises, but none of that made contact lens users go back to frame glasses.
Likewise, these days people who are moving their banking to apps on their phones aren’t going back to brick-and-mortar banks because of trade tensions with China, a recession or the pandemic.
“Major external macro events tend to not matter much at all,” says Ely. “It doesn’t matter if there is a pandemic, or who gets elected, my son is not going back to the bank. That is the creative destruction system that makes capitalism great. We are not going to invest in companies that we don’t think aren’t upending the current ways of doing things.”
Here, one of his plays is Square /zigman2/quotes/205989440/composite SQ -6.73% , a banking app that’s popular among small merchants. It’s also a play on the ongoing shift away from cash.
“We are the last generation to carry cash,” he says about people, ahem, of a certain age.
He likes disrupters even more these days because people adopt new tech and new ways of doing things much faster now. It took 45 years for most people to have a landline. But it only took eight years for most people to own a smartphone.
Other disrupters in his portfolio are Boston Beer /zigman2/quotes/205338227/composite SAM -1.23% , a leader in the “quality food and drink” disruption trend; Novocure /zigman2/quotes/201589146/composite NVCR -1.76% and iRhythm Technologies /zigman2/quotes/208179139/composite IRTC -8.47% , which are leaders in the disruptive virtual health-care trend; and Yeti /zigman2/quotes/206430919/composite YETI +3.73% and Planet Fitness /zigman2/quotes/203234487/composite PLNT +2.74% capitalizing on the outdoor recreation, exercise and healthy living trends.
Historical examples of disrupters are Intel /zigman2/quotes/203649727/composite INTC -1.47% and Microsoft /zigman2/quotes/207732364/composite MSFT -1.82% when they lead the shift to PCs; Home Depot /zigman2/quotes/208081807/composite HD +2.17% and Walmart /zigman2/quotes/207374728/composite WMT -0.96% in big-box stores; and Nike /zigman2/quotes/203439053/composite NKE +0.91% , Procter & Gamble /zigman2/quotes/202894679/composite PG +1.06% and Coca-Cola /zigman2/quotes/209159848/composite KO +1.67% in the globalization of U.S. brands.
When hunting for companies disrupting the normal ways of doing things, Ely wants to go with the leaders. You can identify those because they have the largest market share and the best product or service. They also have strong management teams.