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Food Growth fund manager Gerry Sparrow has beaten 96% of his peers over the last 5 years. He shares 6 stocks he thinks have undeservingly suffered from the rotation out of growth this year - and says they have an average upside of 50%

16:31  16 june  2021
16:31  16 june  2021 Source:   businessinsider.com

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a man standing in front of a building: Sparrow Capital Management © Provided by Business Insider Sparrow Capital Management
  • Growth stocks had a fantastic 2020, but have had a rough start to 2021.
  • Growth fund manager Gerry Sparrow shared 6 growth stocks he thinks have explosive potential.
  • Sparrow said these stocks will benefit from the economic reopening and consumer spending increases.
  • See more stories on Insider's business page.

Growth stocks have suffered a lackluster 2021.

After multiple effective COVID-19 vaccine discoveries in late 2020, and after Democrats went big with a fiscal stimulus package passed through budget reconciliation in the Senate, investors poured their money into the recovery trade, boosting the prices of cyclical assets like small-cap, financial, and energy stocks, among others.

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This has hurt more forward-looking growth names, many of which saw their valuations skyrocket in 2020 as the Federal Reserve pinned down interest rates when there appeared to be no clear path to a complete economic recovery.

But growth stocks are due to resume their strong performance in the months ahead as economic growth continues and inflation begins to cool off, according to Gerry Sparrow, who manages the Sparrow Growth Fund. The fund has outperformed 96% of similar funds over the last 5-year period, according to Morningstar.

That means there are opportunities in the market going forward, Sparrow said, given the broader growth sell-off that has taken place over the last half-year or so.

"Growth sold off the first part of the year, from February to March," Sparrow told Insider on Monday. "So I think we've got some good sailing ahead going into next year."

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Sparrow listed six names he likes the most at the moment, citing the sales growth they are expected to see over the next 18 months, through the end of 2022. In this sense, he said, they are reopening plays.

He said these six stocks have an average share price upside of 50% over that period, which he calculates by averaging the sales growth percentages that each of the stocks are expected to see for the rest of this year and next year.

While some have better growth prospects than others, Sparrow said he recommends owning the entire basket of stocks because of the number of variables that could derail growth for any individual firm.

The six growth stocks Sparrow says you should hold for the next 18 months are listed below, as well as Sparrow's reasons for investing in each stock.

1. Caesars chart, histogram: Markets Insider © Provided by Business Insider Markets Insider

Sparrow likes the casino company Caesers (CZR), because he expects gamblers will come back to the slots and tables as virus cases dwindle. But he also likes Caesars because of its investment in online gambling, acquiring William Hill in April. Online gambling is expected to see continued growth as more states legalize it, Sparrow said.

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Expected top line growth, year-over-year, 2021: 147%

Expected top line growth, year-over-year, 2022: 22%

2. Beyond Meat chart, histogram: Markets Insider © Provided by Business Insider Markets Insider

Next, Sparrow likes Beyond Meat (BYND) because of the growth he expects it to see as restaurants regain customers. He said its sales slumped as restaurant visits fell during the pandemic, but with state after state allowing businesses to reopen as vaccination rates rise, it's only a matter of time before restaurants recover.

Expected top line growth, year-over-year, 2021: 38%

Expected top line growth, year-over-year, 2022: 51%

3. Carvana chart, histogram: Markets Insider © Provided by Business Insider Markets Insider

Sparrow cited surging used car prices — driven in part by the chip shortage in new cars — as one reason he likes used car online retailer Carvana (CVNA). He also pointed to the fact that domestic travel is expected to pick back up going forward.

Expected top line growth, year-over-year, 2021: 74%

Expected top line growth, year-over-year, 2022: 35%

4. Square chart, histogram: Markets Insider © Provided by Business Insider Markets Insider

Sparrow said he's bullish on fintech firm Square (SQ) because of the expected jump in consumer spending at brick-and-mortar locations this year.

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"A lot of the merchants they serve are brick-and-mortar and restaurants and hotels. And these guys get a pick up in their transaction counts, both in the US and internationally.

He also likes that users of its transaction app, CashApp, can purchase bitcoin on it.

Expected top line growth, year-over-year, 2021: 100%

Expected top line growth, year-over-year, 2022: 13%

5. Paycom chart, histogram: Markets Insider © Provided by Business Insider Markets Insider

Sparrow likes Paycom (PAYC), which provides a payroll platform for human resources departments, because of the job gains the American economy is expected to continue to see ahead.

Expected top line growth, year-over-year, 2021: 20%

Expected top line growth, year-over-year, 2022: 25%

6. Docusign chart, histogram: Markets Insider © Provided by Business Insider Markets Insider

Finally, Sparrow likes electronic signature firm Docusign (DOCU) — which benefited heavily from the work-from-home environment during the pandemic — because of their new online notary business.

Similar to Paycom, he said he expects Docusign to benefit from employment gains going forward.

Expected top line growth, year-over-year, 2021: 40%

Expected top line growth, year-over-year, 2022: 29%

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