Themes drive durable growth

Themes drive durable growth

From online retailers to healthcare innovators, many growth companies enjoy a rising tide of demand from consumer and business spending. They benefit from what economists call secular growth trends rather than depending on the ups and downs of the business cycle. These are the kind of companies sought by Richard Bodzy, Portfolio Manager of Putnam Growth Opportunities Fund.

There’s an investment thesis behind every stock selected at Putnam — which is an active, fundamental research shop — but the Growth Opportunities Fund takes it a bit further by determining several growth themes to frame their stock selection. “Our approach includes a thematic overlay,” Bodzy says. “We identify key themes — trends or problems, for example — that businesses are working to address. Then we monitor the themes on an ongoing basis to determine which companies are poised to benefit.”


Personalized medicine


Growing demand for treatment of rare diseases and conditions


Customized approaches based on an individual’s specific needs

Investment opportunity

Companies such as those specializing in gene therapy


Increased screen time


Rapidly growing use of bandwidth and demand for content


Technology that enables and supports content across multiple platforms

Investment opportunity

Hardware, internet, IT security, and software firms

Examples of stock picks that reflect themes

Theme: The humanization of pets
Company: IDEXX Laboratories (IDXX)

Pets have become an increasingly important part of the typical household, receiving the same level of attention, care, and preservation of health as human family members. Demand for quality pet care is strong and growing, and IDEXX Laboratories is a leader in capitalizing on this trend. IDEXX is an animal healthcare company specializing in diagnostic testing, including in-office testing kits for veterinarians. It has a 70% market share of point-of-care veterinary facilities, and has been growing its earnings at double-digit rates. The company’s testing kits, components, and supplies — many of which are disposable items — generate a healthy level of recurring revenue. We believe the double-digit growth rates should continue for many years to come regardless of variations in the underlying economy.

Theme: Digital wallets and e-commerce
Company: PayPal Holdings (PYPL)

The rapidly growing use of digital transactions is a key theme in our research. Among our top investments is PayPal Holdings, which enables businesses and individuals to electronically transfer money. In addition to the growing number of PayPal customer accounts, we are optimistic about the potential to monetize Venmo, the company’s app that provides peer-to-peer payments. User growth has been very strong across the platform, particularly among younger consumers. With 40 million existing accounts, PayPal has the potential to tap into that user base with a number of additional offerings, including innovative banking services. PayPal’s agnostic platform — it is not reliant on a limited ecosystem like Apple’s iPhone — puts it in a strong position to keep adding users and services to its existing base, which should help power its future growth.

As of June 30, 2019, IDEXX represented 1.70% of Putnam Growth Opportunities Fund assets, and PayPal represented 3.31% of fund assets.

Stocks pass rigorous selection criteria

While considering themes, Bodzy and his team do not compromise on demanding quality from the stocks they select:

  • Companies with high and accelerating capital returns and the ability to grow at above-market rates
  • High-quality businesses, industry leaders, and market share gainers with a high percentage of recurring revenues
  • Businesses with an ownership culture, where managers act like owners and align their interests with those of shareholders
  • Stocks that have outperformed in past down markets — an ingredient in their risk management discipline

The outlook for growth stocks

Looking back on a multi-year period of strong performance from growth stocks, some may question whether outperformance can continue. “Yes,” affirms Bodzy, “though there are some important distinctions to be made.” It is critical, he believes, to conduct rigorous front-end analysis that is based on growth prospects over multi-year periods. “At a high level, the companies we target tend to be in areas of the market that are less vulnerable to fluctuations in the economy.”

Although themes serve as a guide, Bodzy and his team of analysts, like all Putnam investors, are rooted in the belief that earnings drive long-term investment returns. Their research focuses on identifying growth drivers that others may overlook or underestimate, creating potential for added upside.

Consider these risks before investing: Growth stocks may be more susceptible to earnings disappointments, and the market may not favor growth-style investing. The value of investments in the fund’s portfolio may fall or fail to rise over extended periods of time for a variety of reasons, including general economic, political, or financial market conditions; investor sentiment and market perceptions; government actions; geopolitical events or changes; and factors related to a specific issuer, geography, industry, or sector. These and other factors may lead to increased volatility and reduced liquidity in the fund’s portfolio holdings. From time to time, the fund may invest a significant portion of its assets in companies in one or more related industries or sectors, which would make the fund more vulnerable to adverse developments affecting those industries or sectors. You can lose money by investing in the fund.

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