Deep Dive: These fast-growing companies that track key consumer trends have produced a nearly 50% gain for one fund in 2020

Fund manager Gerald Sparrow picks stocks by screening 5,000 companies every quarter to find out which are growing most quickly based on unit sales.

He runs a portfolio of more than 100 stocks in the Sparrow Growth Fund. With a portfolio that large, you might expect index-like performance, but this year’s results have been far better than that.

In late April, Sparrow discussed his investment strategy and named Carvana Co. CVNA, +2.72%, an online platform for auto sales, as an example of the type of rapidly growing company he is looking for. At that time (April 29), Carvana’s stock was down 8% for 2020 and the Sparrow Growth Fund SGNFX, +2.77% was up 7%.

Here’s a chart showing the performance of Carvana, the fund, the S&P 500 Index SPX, +0.14% and the S&P 400 Mid Cap Index for 2020 through Aug. 3:

FactSet

That’s a remarkable bounce back for Carvana, but the fund’s performance this year has been stunning.

Sparrow manages about $190 million through Sparrow Capital Management in St. Louis.

During an interview, he pointed to a thread that four companies held by the fund have in common — the accelerating movement away from cash spending, as consumers spend more time at home.

• Square Inc. SQ, +0.51% reported a 44% increase in total net revenue for its fiscal fourth quarter ended March 31, from the year-earlier quarter. The company is expected to announce its fiscal first-quarter results on Aug. 5. As sellers using the payment processor’s platform adjusted to staying at home during the COVID-19 pandemic, “Square created a place for them to create online stores for their products, and then you could open a cash tab for peer-to-peer payments,” Sparrow said. Revenue from bitcoin BTCUSD, -1.05% transaction processing for the fiscal fourth quarter increased almost five-fold from a year earlier, and made up 22% of total revenue. “So the transition from cash to noncash transactions accelerated,” Sparrow said.

• Sea Ltd. SE, +2.84% is based in Singapore. The company provides digital entertainment, including the Free Fire game, and online payment and e-commerce services. Sea’s first-quarter revenue doubled from a year earlier. The company offers the SeaMoney app, which is a mobile wallet connected to Alphabet GOOG, -0.61% GOOGL, -0.75% unit Google. “So this is another cashless transaction company,” Sparrow said. The company is expected to announce its second-quarter results on Aug. 20.

• Trade Desk Inc. TTD, +1.21% offers cloud-based advertising services. For example, companies can purchase advertising space on TikTok through Trade Desk’s platform. The company’s first-quarter revenue was up 33% from a year earlier. It will announce its second-quarter results on Aug. 6.

• EXP World Holdings Inc. EXPI, +11.92% runs the eXp Realty online platform for residential property sales. The company’s first-quarter sales were up 73% from a year earlier. It is expected to announce its second-quarter results on Aug. 5. The U.S. housing market is on fire, as some people feel safer in their own homes rather than in apartments, and as large investment companies bid up home prices as they seek to own them and rent them out. “They have a cloud campus for agents who want to work remotely. So they get revenue from agents listing property,” Sparrow said.

Fund holdings

As quarterly sales numbers roll in, Sparrow will adjust the fund’s portfolio to remove companies whose unit sales growth is slowing, while adding more rapid growers. New positions make up 1% of the fund, and Sparrow allows these positions to increase in size as the stocks rise, as long as sales growth remains high relative to peers.

Here are the fund’s top five holdings (of 119) as of June 30:

CompanyTickerShare of portfolioTotal return – 2020
Shopify Inc. Class ASHOP, -0.65%3.8%172%
Coupa Software, Inc.COUP, +0.08%2.7%114%
Netflix, Inc.NFLX, +2.12%2.6%54%
RingCentral Inc. Class ARNG, -3.63%2.4%81%
Tandem Diabetes Care Inc.TNDM, +1.11%2.4%77%
 Source: Sparrow Capital Management, FactSet

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