- COVID-19 forced businesses to accelerate innovation at unprecedented rates to survive.
- But blindly investing in pandemic-era winners like Zoom Video can be a risky and losing strategy.
- Mitch Rubin, CIO of RiverPark Funds, named seven stocks that can disrupt peers and dominate.
- See more stories on Insider’s business page.
The pandemic has upended life as we knew it within 18 months and ushered in an era that’s known as “the new normal.” That term can also be applied to the investing world as upstart companies like Tesla and Peloton follow in COVID-19’s footsteps by disrupting the status quo.
Markets must now adapt to “massive creative disruption” and the blurring of sector lines as technology becomes ubiquitous, Mitch Rubin, the CIO of RiverPark Funds, said in a recent interview with Insider. Rubin manages his firm’s RiverPark Large Growth Fund (RPXFX), which has $1 billion in assets under management and has beaten 96% of peers in the past year according to Morningstar.
As technology becomes more vital for businesses, it’s getting increasingly irrelevant as a sector label, Rubin said. Tech is the tie that binds seemingly unrelated companies like Chipotle Mexican Grill (CMG) and Nike (NKE), which used apps and websites to dominate during the pandemic and extend leads over less digitally savvy competitors.
“Every business is a tech business,” Rubin said, “because if they’re not embracing technology, then they’re not providing the most efficient service at the lowest price, and they will lose in the marketplace. … If your company doesn’t have a technology-forward perspective, they’re probably on the wrong side of that.”
COVID-19 forced companies to accelerate innovation that may have otherwise taken years in months, and the lack of in-person activity necessitated new business models in some industries.
Direct-to-consumer (DTC) strategies employed by Disney (DIS) and Nike allowed each blue-chip US company to cut out middlemen. Disney’s flagship streaming platform saw explosive user growth in 2020 as it eschewed (NFLX) and built its own customer base while Nike seamlessly sold products to customers while sidestepping Amazon (AMZN).
But DTC isn’t a synonym for “do it yourself.” Disney, Nike, and countless other companies reach users with the help of online advertising giants like Facebook (FB) and Google (GOOGL), which Rubin noted have hefty profit margins that dwarf historic norms.
One of the biggest risks with investing in innovators is that while the future in some ways is inherently uncertain, it’s crystal clear in other ways. It’s so obvious that tech is here to stay that blindly buying shares of proven winners isn’t a sound investing strategy.
Exhibit A and B are exercise-bike maker Peloton (PTON) and teleconferencing platform Video (ZM). Investors have seen those stocks slide 35% and 17.6% in 2021, though the latter was flat entering the week before crumbling after what markets saw as a disappointing quarter.
Neither has “a defensible business for the future,” said Rubin, who is short both names. The best days may be behind Peloton and Zoom, Rubin said, adding that the two disruptors could eventually get disrupted themselves — a cruel twist that’s far from uncommon in markets.
Despite bubble-like characteristics in certain industries as stocks trade at record-high levels and near historically high multiples, Rubin said the optimism is generally warranted. Fundamentals are strong, interest rates are low, and there’s plenty ofin markets, Rubin reasoned, but he warned that investors shouldn’t get too complacent.
“The market generally overshoots,” Rubin said. “There’s no question that there’s emotion and fads driven into the market. Whether or not we’re in a bubble period or not is more industry-specific.”
Be wary of riding the momentum in “story stocks,” which trade at sky-high multiples and attract a more “gambling-oriented” following of day-traders, Rubin said. But high price-to-earnings (P/E) ratios aren’t a reason not to invest in a promising company.
“It’s less about, I think, the current valuation relative to other stocks than, ‘What’s the market opportunity for the company, and how good is the management team, and what could the business be five to 10 years from now?'” Rubin said. “… I think the real differentiator is not ‘what was the P/E when you bought it?’ It’s ‘how much did the earnings grow or how much did the earnings shrink over the next five years?'”
As a portfolio manager, it’s natural that Rubin said he believes active stock-picking presents better opportunities than simply buying an S&P 500. He argued that the gap between winners and losers will widen as innovation breeds competition, adding that incumbents that don’t lean into change and lean on technology are destined to fall behind.
Below are seven stock picks from Rubin, the portfolio manager of RiverPark Large Growth Fund (RPXFX), along with each name’s ticker and market capitalization as well as a category designation and lightly edited commentary from Rubin.
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