Ken Laudan, manager of $126.7 million Buffalo Large Cap Fund (BUFEX), looks for any edge he can find that will help keep his portfolio ranked among the best mutual funds. With most of his holdings, that edge involves companies with savvy management who know how to harness innovations.
The businesses that do it best grow the most, Laudan says.
“I’m just a Midwestern guy trying to make good stock choices,” said Laudan, who is based in the Kansas City, Kan., area. “I’m trying to build a large-cap portfolio whose holdings represent the best ideas of major (economic) themes.”
His fund may make reaching that goal look easy. Yet it is anything but that. “It gets harder and harder to find stocks with a disconnect,” he said, referring to stocks whose prospects are not already reflected in their share price.
Best Mutual Funds: Betting On Powerful Themes
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ASML’s Unique Chipmaking Gear
ASML and Entegris are key players in facilitating the manufacturing of computer chips. ASML makes unique equipment used to manufacture chips. Entegris makes materials used to minimize contamination of semiconductors as they are manufactured.
Currently, they are the fund’s two largest overweights relative to the portfolio’s benchmark, the Russell 1000 Growth Index.
Is ASML Threated By China?
How does Laudan expect ASML to preserve Buffalo Large Cap’s spot among the best mutual funds? ASML is the only maker of computer-chip manufacturing machines that use extreme ultraviolet light (EUV).
Basically, EUV’s tiny wavelengths can etch extremely small nodes, or transistor gates, onto chips. The smaller they are, the more can fit on a chip.
The more gates on a chip, the faster it can compute. “Those complex lithography machines cost $150 million to $200 million each,” Laudan said. “They have to be delivered in three 747 aircraft.”
Tiny gates are essential to the production of fast chips that are at the heart of an array of leading-edge devices. “Without those chips, we could not optimize artificial intelligence, the Internet of Things, autonomous vehicles, robotics,” Laudan said.
ASML’s gross margins are at 51%. “They can get to 56% or 57% in 2025” and higher after that, Laudan said.
But ASML faces a brewing geopolitical risk. Taiwan Semiconductor (TSM) provides 31% of ASML’s revenue. That revenue could be lost if China invades Taiwan, he says. “There’s a higher risk of that after the Beijing Olympics,” Lauden said. Those Winter Games are slated for February 2022.
Is Alphabet Underpriced?
Can a company with as high of a profile as Alphabet have some overlooked factor that make it attractively priced despite having gained 65% this year going into Tuesday, about triple the S&P 500’s return?
How can Alphabet help Buffalo Large Cap defend its spot among the best mutual funds?
The best candidate for that contribution, Laudan says, is Google Cloud. “It is not making money,” Laudan said. “It lost $600 million in the last quarter.”
Where is the good news? “It is the No. 3 player in that space (after No. 1 Amazon[ticker symb=AMZN] Web Services and No. 2 Microsoft (MSFT) Azure),” he said. “And it is picking up market share. It now holds 18% of that market’s share, up from 15% last year. If Google Cloud can achieve breakeven or make a profit, all of that goes to Alphabet’s bottom line. And Alphabet’s valuation could rerate.”
How Danaher Can Help The Portfolio Remain Among The Best Mutual Funds
And how does Laudan expect Danaher to help his portfolio remain among the best mutual funds? Danaher sells supplies to makers of health care products, including drugs and other treatments.
If you bet on Danaher, you don’t have to try to figure out which drugmakers will succeed in inventing a hot new medicine. Metaphorically, Danaher sells picks and shovels to gold miners.
Danaher’s life-sciences segment makes instruments and consumables that customers use to study the basic building blocks of life.
Its diagnostics division makes analytical instruments, reagents, consumables, software and services. Its environmental arm makes products and services that help protect important resources and keep food and water supplies safe.
“It gets 75% of its overall revenue from sales of consumables, not capital equipment or instruments,” Laudan said. So, those sales are more predictable and steadier.
Danaher’s main risk is that its shares trade around 33 times their calendar 2022 estimated earnings. “That’s an all-time high valuation,” Laudan said. “But it is hard to ignore a company with Danaher’s level of predictability, and a company so well positioned and managed.”
By The Numbers: One Of The Best Mutual Funds
Buffalo Large Cap Fund became an IBD Best Mutual Funds Awards winner by topping the S&P 500 in 2020 and in the three, five and 10 years ended Dec. 31.
And this year going into Tuesday, the fund topped the S&P 500, 22.97% vs. 21.73%. Its large-cap growth rivals tracked by Morningstar Direct are up 19.08% on average.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform and rank among the best mutual funds.
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