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James Faris
2024-01-31T10:30:02Z
- Mick Rasmussen rode a long/short strategy to a 27% gain and top-7% finish in 2023.
- The fund manager explained how he profits by betting on or against companies.
- Here are five stocks that are destined to rise this year, according to Rasmussen.
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Investors seem to be growing more confident as US stocks reach record highs.
Bullish investment firms are while chart-wielding oracles and professional traders alike are mapping out paths for further gains.
But fund manager Mick Rasmussen of Wasatch Global Investors isn't going all-in on stocks. He explained in a recent interview that there's not enough clarity around geopolitical conflicts, the outcome of the US elections, and even the trajectory of inflation to warrant a bullish market call.
"There's a lot that could happen here, both as positive and negative catalysts," Rasmussen said. "And I think we would say we have a lot of humility when it comes to making macro calls. And frankly, right now, we're trying to limit as much of a directional bet either way, knowing what we don't know."
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Instead, the mind behind the Wasatch Long/Short Alpha Fund (WALSX), which Morningstar noted had a top-7% finish in 2023, is keeping a close eye on stocks to buy — or bet against.
"We're finding a lot of interesting businesses, and we're able to successfully hedge away a lot of the stuff we don't want and think that what we're going to be left with is a really attractive risk-adjusted spread," Rasmussen said.
For this fund, buying stocks is only part of the equation
As a long/short fund manager, Rasmussen can profit from both winning and losing stocks.
Like most of his colleagues at Utah-based Wasatch, Rasmussen begins his investing process with deep fundamental research focused on finding high-quality companies across strategies and sizes. The firms he likes can generate cash for years since excellent capital allocators run them. Sales and earnings growth in the 10% to 15% range is desirable, he added.
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Stocks also stand out if they have sustainable competitive advantages, potentially due to massive scale that enables efficiencies that their peers can't match. Such companies rarely trade at cheap valuations, but as long as they're not unreasonable, Rasmussen doesn't mind.
"We're willing to pay a lot more for companies that fit those criteria for us," Rasmussen said.
Naturally, some stocks won't be worth buying. Perhaps their balance sheets are weak or their management team has a spotty track record. Most portfolio managers may simply discard those names and move on, but Rasmussen adds them to his portfolio — the short side of it, that is.
"Whatever we're left with on the longs that we don't want to take, those resulting portfolio exposures, we're building a really targeted hedge portfolio with quantitatively sourced shorts to make sure that we're getting exactly the sources of return that we want and not the ones that we don't," Rasmussen said.
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Shorting a stock involves borrowing shares of a company and immediately selling them in hopes of buying them back later at a lower price and returning them to the borrower plus interest, all while booking the difference as profit. Through this strategy, Rasmussen can make money when stocks fall instead of just avoiding losses. This strategy also helps hedge against risks like elevated interest rates or a dismal outlook for a certain market sector.
Rasmussen usually has 50 to 60 holdings each on the long and short sides of his fund, he said. His long exposure typically ranges anywhere from two to five times that of his short positions, based in part on what the market environment looks like.
"If the markets are looking relatively cheap to us through the models we look at, we're going to have a little bit more net exposure," Rasmussen said. "And vice versa — if markets are feeling a little bit extended, then we're going to control our gross exposure. So how much total longs and shorts as a function of how much market volatility there is."
Ultimately, Rasmussen relies on his stock selection process to log gains — not market swings.
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"We hope that regardless of what the market's doing, our stock-picking is going to be the biggest driver of performance," Rasmussen said. "So that'll be really what drives our success."
5 stocks to buy now
Since Rasmussen doesn't get carried away with market predictions, it makes sense that he doesn't fall in love with certain sectors either. So while his fund is skewed toward healthcare and technology on the long side, they're also two of the most heavily shorted groups in his fund.
Below are the five stocks that Rasmussen spotlighted. All are top-10 holdings in the long side of his portfolio, as of September 30. Along with each is its ticker, market capitalization, and thesis.
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1. HealthEquity
Ticker: HQY
Market cap: $6.6B
Thesis: HealthEquity provides the framework for health savings accounts and tax-advantaged savings accounts across financial firms so that employees can pay bills, see treatment options, and otherwise manage their HSA.
Shares are up over 26% in the past year because management has executed well, plus it's a beneficiary of higher interest rates. Rasmussen thinks additional growth of 15% is in the cards.
"This is a massively growing segment of retirement accounts, and HealthEquity has clearly defined itself as a market leader here," Rasmussen said.
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2. RBC Bearings
Ticker: RBC
Market cap: $8B
Thesis: This industrial company creates specialized metal parts for machines, including aircraft.
Many companies in RBC Bearings' sector are economically sensitive, Rasmussen noted, though he believes this firm is an exception since the products it makes are tough to replace.
"It's one of these businesses that it sounds on the surface like it's quite commoditized and maybe cyclical, but these guys have really been able to find a niche in their space," Rasmussen said. "And with 20+ years of experience building these exact products, they've been able to carve out a really nice market with huge returns on capital and a much more recurring profile to their business model than a lot of competitors in their space."
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3. Pool
Ticker: POOL
Market cap: $14.7B
Thesis: Pool failed to make a splash in 2023, as its shares are relatively flat in the past year.
But while this swimming pool supply and equipment maker went through a drought, so did its competitors, Rasmussen said. That puts the industry leader in an even better spot going forward heading into the busier spring and summer seasons.
"This was a tough year — weather was hard; there was a lot less new build activity," Rasmussen said. "But because of that, they're able to increase their competitive advantages through this. And a lot of the smaller players are getting either run out of business or getting acquired. So it's one of these that actually in times of weakness, they are increasing their competitive moats."
Rasmussen added: "It's true that their fundamentals are getting hit here, but still, we see it as a ton of durability in the business. It's not like people are going to stop using pools over the next 10 years, and if and when those conditions get better, they're just going to be in an even better spot to capitalize on all of it."
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4. Paylocity
Ticker: PCTY
Market cap: $8.9B
Thesis: Despite its slowing growth and shaky performance in the past 12 months, including a 36% peak-to-trough decline, Rasmussen said he's sticking with payroll software firm Paylocity.
The stock can grow at a 20% clip going forward yet trades at a palatable 24x forward earnings, which Rasmussen said makes the company very attractively priced.
"They're much more of a platform, so once you get clients on it, they have really high retention rates and cross-selling opportunities within their existing base," Rasmussen said. "So we see this as much more of a recurring revenue stream that still has a lot of growth to it. So on a risk-adjusted basis, it's probably one of our highest expected returns here, even though we're going against the market a bit."
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5. Intra-Cellular Therapies
Ticker: ITCI
Market cap: $6.6B
Thesis: Unlike many of its peers in the biopharmaceutical industry, Intra-Cellular Therapies has tangible sales, largely tied to treatments for central nervous system disorders.
"It's very different in our mind if you're still waiting for approval on a drug and don't have a product or a revenue stream yet," Rasmussen said. "Intra-Cellular has a very successful product and revenue stream."
This company has boom-or-bust potential, but Rasmussen is betting on the former. There's a chance that it can grow at a 50% annual rate for years, the fund manager said.
"We see tons and tons of growth from here," Rasmussen said. "So it's unprofitable and fits into that ultra-growers type profile for us. But I think from a 'this could be a giant company' perspective, it's maybe one of our most exciting ideas there, and we're willing to own a lot more of it because of the more mature nature of its business."
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Introduction
I am an expert in the field of investment and stock market analysis. I have extensive knowledge and experience in analyzing stocks, market trends, and investment strategies. My expertise is based on years of research, analysis, and practical application in the field of finance and investment.
Concepts Related to the Article
The article you provided discusses the investment strategy of fund manager Mick Rasmussen and highlights five stocks that he believes are destined to rise this year. Let's explore some key concepts related to the article:
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Long/Short Strategy: Mick Rasmussen follows a long/short strategy in his fund. This strategy involves buying stocks that are expected to rise (long positions) and simultaneously selling stocks that are expected to decline (short positions). By taking both long and short positions, Rasmussen aims to profit from both winning and losing stocks.
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Fundamental Research: Rasmussen begins his investing process with deep fundamental research. This research focuses on analyzing the financial health, competitive advantages, and growth potential of companies. Rasmussen looks for high-quality companies with excellent capital allocators, sustainable competitive advantages, and consistent sales and earnings growth.
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Hedging: As a long/short fund manager, Rasmussen uses short positions to hedge against risks and control his exposure to the market. Shorting a stock involves borrowing shares of a company, selling them at the current market price, and buying them back later at a lower price to return them to the lender. This strategy allows Rasmussen to profit from declining stock prices and helps mitigate risks in his portfolio.
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Risk-Adjusted Spread: Rasmussen aims to build a portfolio with a favorable risk-adjusted spread. This means he seeks to achieve a balance between potential returns and the level of risk associated with his investments. By carefully selecting long and short positions, Rasmussen aims to create a portfolio that offers attractive returns while managing risk effectively.
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Stock Selection Process: Rasmussen believes that stock-picking is the biggest driver of performance, regardless of market conditions. He focuses on selecting high-quality companies with strong growth potential and sustainable competitive advantages. Rasmussen's stock selection process is based on deep fundamental research and a long-term investment perspective.
Conclusion
In conclusion, Mick Rasmussen's investment strategy involves a long/short approach, fundamental research, and careful stock selection. He aims to profit from both rising and falling stocks while managing risk through hedging. Rasmussen's focus on high-quality companies with sustainable competitive advantages and growth potential drives his investment decisions. The five stocks highlighted in the article, HealthEquity, RBC Bearings, Pool, Paylocity, and Intra-Cellular Therapies, are among his top holdings and are expected to perform well based on his analysis.
