Stock picks from Neuberger Berman fund managers crushing the market

A
Chegg.com campus event in Los Angeles,
California.
Amy
Graves/Getty

• Neuberger Berman’s Small Cap Growth Fund is outperforming
  its benchmark this year, thanks to a handful of healthcare and
  tech stocks. 
• Two of the fund’s managers recently spoke to Business
  Insider about their strategy and some of their top
  stocks. 

Investors looking for under-the-radar stocks can find a fertile
ground in the small-cap universe. 

In that space, companies worth between $200 million to
$2 billion receive much less attention than the FANG stocks, for
example. And the fund managers who perform best are able to jump
on stocks that have catalysts the market has not yet
recognized. 

This sums up the strategy of Neuberger Berman’s Small Cap
Growth Fund and its managers. The $100 million fund has
appreciated by 28% this year, outpacing the 11% gain of the
benchmark Russell 2000. It’s also the best-performing fund this
year across the firm, according to Morningstar. 

“We love it when almost nobody follows a company on the
street, and we do our own research, and then they find out about
it later,” Ken Turek, a fund manager, told Business Insider. “If
it’s a good story, the stock price moves up.”

Turek also attributed the fund’s performance to its relatively
flat management structure. Unlike other funds, Turek and his
colleagues don’t have to run every stock pick by a head portfolio
manager. 

“It was a much quicker way for ideas to get into the portfolio if
we gave the authority to the sector analysts to actually
institute trades,” he said. “We run the portfolio with
almost zero cash so when a new idea comes up, something else in
the portfolio has to be moved out.” 

What they won’t buy, however, includes companies in
commodity-based sectors like materials, chemicals, and others
that they don’t have an edge on.  

The stocks with the biggest weights in their portfolio are in
healthcare and tech. Here are three of them. 

Sientra

This company is one of three big players in the roughly $500
million market for breast implants and reconstruction surgery in
the US, according to Marco Minonne, another fund manager. Its
stock is up 155% this year.

A fire ravaged Sientra’s
Brazilian manufacturer’s plant in 2015, but Minonne sees the
company recouping its lost market share in the breast-implant
market over time.    

What he’s really bullish about, however, is a product called
MiraDry, which aims to treat excessive underarm sweating, a
condition known as axillary
hyperhidrosis.  

MiraDry’s treatment destroys the sweat glands in armpits,
and
 promises
to deal with problems like stains on white undershirts. The
procedure lasts for an hour, although side effects like
soreness and tingling may linger for weeks. 

Minonne said Botox, an alternative treatment, is less
desirable than MiraDry because it involves several doctor’s
visits and pricks.

Sientra’s return on investment is quick, he said, as the
company can recoup the cost of one its machines within a year by
treating one patient a week. 

“We also see a path towards a doubling of the stock over
time if the MiraDray rollout comes out very similar to what
CoolSculpting [a fat-reduction treatment] did for Zeltiq,”
Minonne said.

Minonne estimated that the market for servicing patients who need
to treat hyperhidrosis as a medical condition —  not just
those who want to sweat less — is about $1.5 billion.

Markets
Insider

Chegg

The company first earned its reputation as a place where students
could buy or rent discounted textbooks.

Chegg
still promises that students can save up to 90% off full prices,
but has expanded its services into what Turek called an “Uber for
tutors.” That’s a reference to the independent contractors who
assist students in subjects ranging from algebra to medieval
philosophy. 

“What parent isn’t going to pay 20 bucks a month to have their
kid do a better job in school and get better grades,” Turek said.
“And over time, they will probably add more services to the
product line.” 

He sees the company’s success as stemming from word-of-mouth
marketing among students and the ease of using the product. 

What also makes Chegg attractive is the size of its addressable
market. According to the National
Center for Education Statistics, 15 million students are
expected to enroll in high school this fall, and 20 million in
college.

“They currently have like 2 million subscribers [2.2 million in
2017 according to company filings], so you don’t have to be
particularly heroic in your assumptions of what the subscriber
growth could be,” Turek said. 

Chegg’s stock has gained 89% this year. The company reported
32% revenue growth in the second quarter, while subscribers
increased by 45%.

“It’s inevitable that more people are going to learn online, not
less,” CEO Dan Rosensweig told
CNBC after the earnings results. 

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Ring Central 

Ring
Central, with a market cap of $7 billion, provides companies
with cloud-based telephony, messaging, and video conferencing.
Its appeal to Turek stems from making these essential services
cheaper for companies.

In a traditional setup, companies need to invest in a so-called
private branch exchange (PBX) that allows many staff members to
share a single number. A PBX also routes callers to the
appropriate extension and allows them to leave voice
messages.  

“A company like Ring basically hosts all of your services for you
so you don’t have the capital expense, you don’t have the IT
staff on board, and you can very easily manage consumption of
various communication,” Turek said. 

He added that the company carved out a niche by marketing to
small-to-medium-sized businesses, and is scaling up to larger
corporations. 

This company is one of the largest holdings in the small-cap
fund’s portfolio and has surged 156% since it was first added in
July 2017. 

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