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- We believe that innovation trends create opportunities for companies outside of the Magnificent Seven mega caps that have dominated stock indices recently.
- Promising secular trends in AI, cloud software, life sciences and digital payments give companies new ways to serve and grow their markets for the long term.
- We see companies beyond the Magnificent Seven that can benefit from future innovation and have the resilience to provide downside protection.
Growth stocks gained a lot of attention in 2023 with the Magnificent Seven stocks delivering outstanding performance. Interest rate increases typically have a lagged effect on the economy, with rising borrowing costs making it more difficult for some companies to invest in capital expenditures. Given the uncertainty surrounding interest rate movements going forward, where are the upside opportunities for stocks now?
At Parnassus, we believe there is still plenty of runway for growth companies based on promising secular trends that continue to open up investment opportunities for long-term investors. Many of these trends have been around for years and should continue to propel companies forward for years to come. As an investor, we apply our highly selective research process to identify companies that we believe are tomorrow's leaders. Here are some of the themes we are considering as a backdrop for our growth portfolios:
The boom in AI that has powered much of the Magnificent Seven gathering is a long-term trend that will likely play out over the years. We aim to avoid overpaying for AI in software, but still see opportunity in other beneficiaries such as Salesforce ( CRM ) and Intuit ( INTU ), both current leaders in their respective markets with established scale and large user bases that are positioned to layer AI on top of their products. We think semiconductor companies developing chips for AI-related innovations are also well positioned for growth, especially those that play a key role in data centers driving AI models, such as Advanced Micro Devices (AMD). . Monolithic Power Systems (MPWR) is a manufacturer of solutions that help manage energy efficiency in AI chips. Cadence ( CDNS ) not only makes the software that designs the semiconductors that power AI, but they've incorporated AI into their tools. You also can't have AI without the equipment, manufacturing and testing required to fabricate semiconductors. Our funds own several stocks of companies with key roles in the semiconductor supply chain, including Applied Materials (AMAT), Taiwan Semiconductor (TSM), KLA Corp. ( KLAC ) and Teradyne ( TER ).
The digital transformation that has moved technology to the cloud to help companies manage their operations more efficiently is also far from over. We believe that corporate IT spending is picking up again, especially in industries that have so far lagged behind in the move to cloud-based platforms. The added layer of AI capabilities will drive demand for cloud computing performance monitoring systems like Datadog (DDOG). They are also integrating AI into their product to make it even better. We also like HR and financial management software provider Workday ( WDAY ), which is a beneficiary of vendor consolidation when companies look to streamline systems that support employee hiring and management, as well as vendor procurement. Also promising in our view are software companies geared toward improving specific end markets, such as Guidewire (GWRE), which provides software and services to property and casualty insurers, and Procore (PCOR), a leading provider of construction management software.
New methods of drug development to treat a wide range of diseases and conditions open tremendous opportunities for pharmaceutical companies and the millions of patients being treated by their products. Precision medicine is an innovative approach to helping patients manage medical issues through information about their genetics, environment and lifestyle. There are innovative scientific techniques such as gene editing, cell and biological therapy that drive research and product development of new products and treatment programs. We believe this important work could open a golden age of new drugs. However, finding the next movie can be quite challenging.
From an investment perspective, we are attracted to companies that support scientific research and provide services in the health care and science markets. Companies that make the picks and shovels used in drug research can help lower the costs of drug development. Companies can benefit as drugmakers work on more complex therapies and as the increase in available drugs requires more quality control. Examples include Thermo Fisher Scientific ( TMO ), Danaher ( DHR ), Agilent ( A ), and Repligen ( RGEN ). Thermo Fisher, a leading global provider of products and services that support global life sciences research and improve patient diagnostics, has a large-scale distribution platform that has enabled them to see where the industry is going, allowing them to invest and innovate more profitably. Danaher makes complex machines to research new drugs. Agilent manufactures critical tools for the healthcare industry and benefits from increased spending on healthcare research and development. Repligen's picks and shovels, already used in biology, are expanding into faster-growing markets such as cell gene therapy and mRNA vaccines.
The pandemic accelerated the frequency of online payments due to convenience and health concerns, a trend that continues as companies find ways to make digital commerce even more seamless in our daily lives. In fact, roughly two-thirds of the world's consumers now make or receive digital payments, according to the World Bank. Three companies with major offerings include Visa (V), Adyen (ADYEY) and Block (SQ). Visa's digital payments platform has sustainable competitive advantages that are difficult to replicate. The company has a global presence in the daily lives of millions of consumers, making the company an irreplaceable asset in the global payments system. Adyen provides a one-stop payment processing platform for cross-border transactions. As e-commerce continues to grow, Adyen is poised to grow along with it. With 85% of its revenue coming from e-commerce, Adyen is positioned to capture the ongoing trend of online shopping. Block (SQ) owns Cash, the popular peer-to-peer consumer finance app, and the Square payment processor for small businesses. With its founder Jack Dorsey looking to increase margins and improve collaboration across segments, we believe there is significant upside for the stock.
In a market where many investors are tempted to follow the usual suspects that grab attention, our growth funds, Parnassus Growth Equity Fund (PFGEX/PFPGX) and Parnassus Mid Cap Growth Fund (PARNX/PFPRX), have exposure to various trends in secular growth. . But they are united in their strategy of investing in high-quality companies that are at the top of their categories. We see many companies outside of the Magnificent Seven that are positioned to take advantage of future innovation, and from where we sit, the future looks bright.
Investing mutual funds involves risk and loss of principal is possible. There is no guarantee that any investment strategy, including a socially responsible (ESG) investment strategy, will be successful in any market environment. Stock markets can be volatile and stock values fluctuate in response to the asset levels of individual companies and in response to general U.S. and international market and economic conditions. The Fund invests in small and/or mid-cap companies, which are generally riskier than larger companies, and the Fund's share price may be more volatile than funds that invest in larger companies. Past performance cannot predict future results. Dividends are not guaranteed and may fluctuate.
For the current properties of Parnassus Master Equity Fund, Parnassus Growth Capital Fund, Parnassus Value Equity Fund, Parnassus Mid Cap Bottom, Parnassus Mid Cap Growth Fund AND Parnassus Fixed Income Fund, please visit each fund's individual holdings page. Funding areas are subject to change at any time.
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