Buy these 6 stocks now to bet on the AI revolution and other rapidly growing industries, according to the managers behind a fund that’s rebounded from bottom 1% performance last year to a top 1% performance in 2023

• One of this year’s top mutual funds is coming off back-to-back bottom-1% finishes.
• The fund’s managers stuck to their time-tested investing process during the bear market.
• Here are six top growth stocks in rapidly expanding industries like artificial intelligence.

In a sea of growth-oriented funds, the Virtus Zevenbergen Innovative Growth Stock Fund (SAGAX) stands out — for better or worse.

Since 2020, when it finished as one of the top-1% mutual funds in the market, the fund has been on a rollercoaster ride, according to Morningstar. However, the fund fell to back-to-back bottom 1% performances in 2021 and 2022, with a crushing 55.4% loss last year.

However, the recovery is well underway this year. The growth stock basket has gained an astounding 62% year to date, making it one of the best-performing mutual funds in 2023.

Despite the rags-to-riches transformation, portfolio managers Anthony Zackery and Joe Dennison appear to be unscathed. In a recent interview with Insider, the duo stated that they have prioritized their process and are looking forward rather than back.

“It really comes down to maintaining a consistent focus on staying true to who you are,” Dennison told Insider. “Focus on innovation and company fundamentals, which are ultimately the drivers of stock price performance.”

“We’ve lived through many bouts of extreme volatility,” Zackery added, “but nothing has shaken our belief in what drives long-term investment outcomes.”

How to successfully invest in growth stocks in any market

The core tenets that have sustained the Virtus Zevenbergen Innovative Growth Stock Fund through the storms of recent years are simple, but adhering to them can be difficult.

Together with Nancy Zevenbergen and Brooke de Boutray, who have co-managed the fund since its inception in early 2004, Zackery and Dennison said they look at a company’s management team, ability to access capital, and how it’s growing revenue, earnings, and free cash flow.

Together, those characteristics indicate not only a company’s current trajectory, but also how well it will fare during turbulent times, according to Zackery. He added that the best business plan in the world doesn’t matter if the leadership team can’t execute it, which is why he prioritizes investing in well-run businesses.

Zackery, a growth investor, said he looks for companies with overly conservative forward estimates. According to him, revenue growth often provides the best indication of a company’s future potential.

However, a company’s fundamentals are only one component of the equation. While Zackery isn’t as obsessed with valuations as many value-oriented managers, he does make certain that he’s paying a fair price for a company’s future growth. His team accomplishes this by comparing a company’s valuation based on price-to-sales, price-to-earnings, or enterprise value-to-EBITDA to that of its industry peers and other holdings. Stocks can trade at a premium as long as it is justified, according to Zackery.

Dennison added that the fund’s long-term focus allows it to invest in companies with no earnings as long as their bottom line is growing, they are on a path to profitability, and they have a solid balance sheet.

6 places to invest now for strong growth

Although only a few stocks fit that description and are included in the fund, those that do tend to last. According to Dennison, the Virtus Zevenbergen Innovative Growth Stock Fund typically has 30-to-40 holdings at any given time, and stocks stay in the portfolio for an average of more than five years. While diversification is beneficial, Zackery and Dennison believe that a concentrated fund is preferable. Over half of the fund’s assets were in its ten largest holdings as of the first quarter, with over 80% in either the information technology or consumer discretionary sectors.

Right now, Zackery and Dennison see opportunities in four fast-growing market segments: artificial intelligence (AI), cloud computing, ecommerce, and electric vehicles.

This year’s AI boom has captivated investors’ attention, and Zackery is no exception. Despite its rapid growth, the technology is still in its “first or second inning,” according to the fund manager.

He believes in chipmakers that enable AI, such as Advanced Micro Devices (AMD) and Nvidia (NVDA). This year, the latter is the best-performing stock in the S&P 500.

Amazon (AMZN) and Netflix (NFLX) also have AI exposure, according to Zackery, because they have “unique, large, and proprietary data” that can be used to train AI models. Amazon also has direct exposure to the rapidly expanding cloud computing and ecommerce industries, which explains why it is currently his fund’s sixth-largest holding.

Early in the pandemic, the value of e-commerce companies skyrocketed, only to plummet when the economy began to recover. Despite the fact that demand has been pushed forward, Zackery believes the industry has plenty of room for long-term growth because online shopping accounts for only 20% of US retail sales. A similar thesis can be applied to electric vehicles, which, according to Zackery, currently account for a low-single-digit percentage of cars on the road in the United States.

Shopify (SHOP), an upstart Amazon competitor that is the fund’s fifth-largest position, is a prime example of a pandemic winner-turned-loser. According to Zackery, the Canadian e-commerce company has roared back to life since it divested its logistics assets. He admires how the company is founder-led and has increased profit margins, which is why he has remained with it for years.

Mercado Libre (MELI) is another stock to consider, as it seeks to expand its dominance in Latin American e-commerce. Dennison noted that the Uruguay-based company has made prudent investments in payments and credit, which now account for more than 40% of its revenue. The manager believes that the company will grow in tandem with the market.