10 Growth Stocks for Long-Term Investors

When an investment manager beats the market by incredibly wide margins over extended periods of time, his picks are definitely worth a look. The Concentrated Alpha Portfolio from Sandhill Investment Management of Buffalo, New York is up by 279.4%, net of fees, since its inception in March 2004, according to Barron's, more than double the 133.5% gain for the S&P 500 Index (SPX). In 2017, the respective figures were 33% and 19.4%, also per Barron's.

These were the portfolio's top 10 holdings as of March 2, collectively accounting for 42% of its value, per data provided to Barron's by Sandhill: Adobe Systems Inc. (ADBE), Global Payments Inc. (GPN), Dentsply Sirona Inc. (XRAY), U.S. Foods Holding Corp. (USFD), Zoetis Inc. (ZTS), SiteOne Landscape Supply Inc. (SITE), Novanta Inc. (NOVT), Gardner Denver Holdings Inc. (GDI), Bio-Techne Corp. (TECH) and Presidio Inc. (PSDO). We'll discuss Global Payments and Bio-Techne below, as well as CoStar Group Inc. (CSGP). (For more, see also: Top 3 Growth Stocks for 2018.)

'You Get Paid to Concentrate'

The founder of Sandhill, Edwin "Tim" Johnston, told Barron's: "You get paid to concentrate in the equity markets. The average mutual fund has over 100 stocks. Why do you want want to revert to the mean?" By contrast, his Concentrated Alpha Portfolio typically holds just 25 to 30 stocks. Also, he added, "Restricting yourself by market capitalization makes no sense."

Johnston noted that his firm looks for "companies with structural advantages and hidden earnings power that haven't been recognized by the market. I listen to a lot of conference calls. A great outcome has a very high correlation with a great CEO." Wary of value traps, he prefers to "pay up" for "world-class companies," observing that "with the earnings power, the stock is still a bargain."

Doing Their own Homework

Sandhill does not pay much attention to Wall Street research reports, Johnston told Barron's. Instead, they scrutinize 10-Ks, 10-Qs and earnings call transcripts, looking for a company with a "structural economic advantage that it can exploit for a long period of time." Next, they have in-depth discussions with the CEO, the CFO, or investor relations, as part of a due diligence effort that usually takes between two weeks and a month, he added.

Global Payments

Global Payments is a "merchant acquirer," a company that processes credit and debit card purchases for merchants. Johnston told Barron's that CEO Jeff Sloan is "one of the smartest people we've ever followed." Through acquisitions and sophisticated customer-specific analytics, Global Payments has grown to be the sixth largest company by market share in its field, Johnston added, with its customer base being small and medium-sized merchants.

He likes the fact that Global Payments derives 19% of its revenue from Europe and 8% from Asia, both of which are growing markets. He has a target price of $153 by the end of 2019, 30% above the close on March 14. (For more, see also: 5 Characteristics of Good Growth Stocks.)

Bio-Techne

Bio-Tech derives 65% of its revenue from proteins, antibodies and reagents, and the rest comes from sales of instruments and diagnostic equipment used by larger players in biotech, Johnston told Barron's. One of its recent acquisitions is Advanced Cellular Diagnostics, which has a patented test used in cancer treatment that is 95% accurate, versus 75% accuracy for the current test, he said. It represents only about 10% of Bio-Techne's total revenues, but is growing its own revenues at nearly 50% annually, per Johnston.

For Bio-Techne as a whole, Johnston says that it is highly profitable, with revenues increasing by 15% per annum. He has a price target of $195 by mid-2019, 33% above the March 14 close.

Co-Star

"It's an incredibly cool company," Johnston told Barron's. Founded in 1987, he called Co-Star "the Bloomberg of the real estate market" wth respect to its extensive, decades-long databases on buildings, locations, tenants, lease expirations and sales listings. He notes that their closest competitor just filed for liquidation, enhancing Co-Star's pricing power. Their operating margin was 29% in 2017, and they have a long-term goal of 40%, Johnston told Barron's.

He has a price target of $455 by the end of 2019, 25% above the close on March 14. He projects Co-Star to have $900 million of net cash in 2020, a big factor in developing his price target.