John Barr is portfolio manager of the Needham Growth Fund [ticker NEEGX] and the Needham Aggressive Growth Fund [ticker NEAGX].
I spoke with him Jan. 2, when growth has come into question as the economy slows from the Federal Reserve’s unprecedented interest-rate increases. His take, as you can read below in my interview with him: “I can’t predict if there’s going to be a recession. And consequently, I focus on the companies.”
That’s a prudent approach for any investor. Control what you can, in other words, especially when you’re investing, as John is, over a 10-year horizon where serious compounding can occur.
Case in point: His top holding, Super Micro Computer, which he discusses. The maker of high-performance and high-efficiency servers comprised 10% of the Needham Growth Fund at the end of September. The stock more than tripled last year and is up a staggering 1,700% in the past five years. The fund itself was ranked in the top 15% of peers in its mid-cap growth category last year, according to Morningstar.
This interview was lightly edited for clarity.
Chuck Jaffe: We just came off of a really interesting year in the stock market, as we did the “Magnificent Seven” all year. It was a very strong year for you and your fund, but there’s a lot of talk about when, or if, we’ll get a recession. So give us the basic picture for growth investing right now and what you see happening in terms of this recession coming.
John Barr: Let me just put in a little context. So as we started last year in January and into early February, it looked like it was going to be a horrible year. But then starting in February, aspects of the market started to work pretty well. And there were months that were significantly positive and then there were others that were not so positive. Yet in the end, it turned out to be a reasonable market for, certainly the seven big stocks, but even the broader indexes. But for me, it really is to focus on companies that fit the strategy that we’re investing in, a strategy I term “hidden quality compounders,” which is looking to find companies that are making investments today that the market doesn’t recognize and then to hold on to them.
CJ: It’s funny you should say that because, coming up after you on today’s show in the market call, is Manny Weintraub of Cannell & Spears. He is also a guy who is very big on compounding. And one of the things that he talked about the last time he and I spoke was how he was now making sure he was putting in not so much a rolling 10 years, but that he looked at everything and said, what I really want to see is what’s this company going to do in 10 years. So when you’re talking about compounders and growth, how much of it is what you can do for me now and how much of it is longer term? Let me kind of collect the toll as you get off to that long-term destination.
JB: Right. So my philosophy is that the market doesn’t look forward more than 18 to 24 months, but that’s really just the starting period. When I look to analyze a company, it would be ideal if what we were looking for in terms of a new investment paying off is 18 to 24 months, but it often takes much, much longer. It can take three, four years. And my average holding period is 10 years.
So there are three parts to the process. The first is when we’re identifying the hidden compounder, making the investment. The second is when the business starts to transition and the key is to hold on. And then the third part is when quality financial metrics are showing through and the real challenge is to hold on through that time period. And in the end, it averages about 10 years for me, which is where great compounding can happen.
CJ: In terms of what you are looking at today, are you finding that you have to be more patient, given what you see happening?
JB: Great question. For about the last five years, I’ve been focused from an industry perspective on infrastructure broadly defined. And it means, yes, roads and bridges and concrete, but it also means technology infrastructure. And a couple aspects of technology infrastructure are data centers, which then in the last year meant artificial intelligence and semiconductor manufacturing. But it also means life sciences manufacturing, it means engineering, it means labs. So that’s where I’ve been focused from an industry perspective. And I think with the reshoring of manufacturing in the United States and the focus on the energy transition and the focus on the environment, there’s a lot of investment that needs to happen in the United States. And these are companies that we’ve owned that contributed very nicely last year, which led to our strong results. And I think we will continue to see tailwinds behind these themes in 2024.
CJ: When you talk about growth companies and you’re looking out longer term, how much does a possible recession wind up impacting you? Nobody seems to think the trouble’s been repealed. So if that 18- to 24-month period that you were talking about is crucial, how much does it get thrown off or how much do you have to factor in what could be a big-picture problem at some point toward the end of that window?
JB: Yeah, I’m not really focused on it. I can’t predict if there’s going to be a recession. And consequently, I focus on the companies. And if there are long-term demand drivers behind them, that’s what I’m looking for. Now, I’m looking to buy these companies that are investing in something that the market doesn’t recognize today, but I’m also looking to do that with a margin of safety. So that can be a very strong balance sheet that captures a significant portion of the value. It can be a legacy business that, if you shut it down, the new thing could support the value. So rather than try to forecast a recession or not, we protect ourselves and our investors through investing at a margin of safety.
CJ: One of the most explosive growth industries of the last 12 to 18 months has been AI, artificial intelligence. And you have to be playing it to one extent or another. But to what extent are you looking at that industry and how much of that growth curve is behind it versus ahead of it?
JB: So as I mentioned, data centers have been an important area for us going back … to really since I took over the fund in 2010 and bought Equinix, the data center company, as one of the first new investments. We also at the time bought Super Micro Computer SMCI , which at the time was making motherboards, has since migrated their business to supplying servers and then systems which are used in data centers. As we entered the year, it was one of our top 10 holdings and long-term we’re not selling, so we held on to it. And late last year, they started to talk about their strength from artificial intelligence and they had just a gangbuster year, supplying Nvidia-based NVDA systems to some of the leading AI companies. And the stock was up 240-some percent over the course of the year, and as of September 30th, it was the largest holding in our fund. So, a very nice contributor. We also, in 2021, bought Vertiv VRT , which supplies electromechanical heating and cooling systems to data centers. And again, in ’22, we started to get glimpses of it. And then it was just a spectacular year up over 250%. So by being in the data center business, these companies saw a big benefit when artificial intelligence took off. So it’s being in a good business, good things happen, and in this case, great things.
CJ: Those are picks-and-shovels investments rather than necessarily being on the cutting edge of the technology. And that, I guess, goes back to the idea of compounding. What do you make of something like blockchain? Is that another picks-and-shovels [idea] rather than leaning in toward crypto and things along those lines?
JB: Yes, a blockchain requires great computing and therefore requires data centers. So all of that is good for us. And picks-and-shovels is exactly how we term it. The infrastructure spending, that is really picks-and-shovels.
CJ: Since you talk about infrastructure investing, how much do you worry at this point that the government, as dysfunctional as it is, and I don’t really like talking politics, do you worry that politics is a wild card that’s going to wind up affecting a lot of the infrastructure companies?
JB: Our companies [in] infrastructure are pretty focused. An example is Parsons Corp. PSN . They are the leading contractor, the leading architecture engineering construction company for airport construction for new airports. We’ve under-invested across the country in airports. They were doing very well with that. They do other infrastructure that is very much needed. Then they have a government services business that sells military defense, three-letter-agency work. So cybersecurity and other security. I think all that spending is gonna happen and doesn’t much matter the dysfunction that we see in Washington.
CJ: In terms of the growth that you are finding, obviously U.S. markets have been the best markets in the world, but are you finding things that make you say you want to find better opportunities or better growth among any international players or multinational players?
JB: Well, we’re focused on North American companies and most of it, 99% of that is U.S. So we think this is the best place to invest in the world with the rule of law and companies that we can understand. We don’t have any particular edge elsewhere. And we get the international exposure from our companies that are doing work in other countries. The big thing I’ll point out there, though, is the pullback from China.
And we just take it for granted that selling into China and having operations was a good thing. That’s just not the case anymore. You view it quite otherwise.
CJ: An interesting question to ask in this day and age that I don’t think I’ve asked portfolio managers, but you and I have known each other for a long time and I’m not calling you old, but you are a veteran of this industry. So you have been around doing this long enough that what is now called ESG investing was social investing. They stopped using that term because it implied that everyone else is anti-social.
So you do not run a fund that is known for being ESG. But I’m curious, in all the factors that you look at, do any of the ESG factors come up? In other words, is there ever a point where you are looking and going, yeah, I’m not an ESG manager. I’m not gonna suddenly make that part of what I do. But, you know, here’s the social side, here’s the governance side. But I can’t imagine you ignore anything that is visible about any company you’re looking at.
JB: I think we actually show up with pretty good ratings, despite that it’s not an overt part of our strategy. But when you’re investing in companies that are run by the founders, family or long-tenured managers, and when you’re looking to hold them for 10 years, those companies think long-term, and many of the ESG tenets are about treating your community well, treating your employees well, and those are all the same things that help a company perform over a long period of time. And then also, we do have an industry filter, and I’m just not going to invest in tobacco or alcohol or many of the sin areas, even though some of them may show up quite attractive financially. So it’s not an overt part of what we do, but I think it’s kind of embedded in the types of companies that we look at.
CJ: I’ve got an interesting question based on the time that we are this year. A year ago, we were coming off a terrible year for the market and you had to be looking ahead going, I’m optimistic or I’m not optimistic, or I think this is what we can get out of the market. Well, here we are coming off a great year for the market, a great year off that terrible year, an election year and the rest. What is your general sense? What is your spider sense telling you? Not specific to the companies, but just kind of, your level of anxiety entering this year, if you will.
JB: I’m going to take it back to the micro level, Chuck. And I’m going to say, I think there are still attractive opportunities in the micro- and small-cap for companies that we don’t own. And there are plenty of companies that we own that are attractively valued with significant upside opportunities in an even shorter 18- to 24-month time horizon. So we’re always anxious, but I’m not worried. This is a great country. These entrepreneurs that we get to invest with are amazing people and they’re the ones that are creating innovations that are moving society forward.
CJ: If folks can stay focused on what matters, which in your case is that finding the right companies and sticking with them long-term, the point is you can ride things out. John, great stuff. Thank you so much for joining us. Again, happy new year. We’ll talk to you again down the line.
JB: Thank you, Chuck. Happy new year.
Chuck Jaffe is a contributor at Equities and the host of “Money Life.”