- Jason Tauber manages the Disrupters portfolio for famed investment firm Neuberger Berman. The portfolio more than doubled its benchmark, the Russell 1000 Growth Index, in the first half of 2020.
- Tauber says one key to his success is finding "hidden" businesses within companies that can become huge contributors to a stock's performance in the future.
- He told Business Insider about three companies in his portfolio that illustrate how that approach can work.
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The iPhone, Amazon Web Services, and Netflix streaming. At one time, these things were only small pieces of companies focused on other things — but with time, they became essential parts of their success.
Finding underappreciated businesses is a key element of stock picking, but finding overlooked pieces of business can also be a very valuable skill.
"We try to look in areas of a company business that others aren't focused on," said Jason Tauber, who runs the Disrupters portfolio for investment firm Neuberger Berman. "That optionality is helpful in terms of mitigating downside if your primary thesis doesn't go right, and also providing potential upside."
Finding those companies has been a big help to Tauber, who has beaten the market four out of five full years since the portfolio was created. In the first half of 2020, Disrupters returned 22.6% after fees while its benchmark, the Russell 1000 Growth Index, rose less than half as much for a gain of 9.8%. Broader stock indexes were negative.
"Our analysis always starts with looking at what's the total addressable market that either this company is trying to create or disrupt," he said. From there, he and co-manager Rick Bradt analyze the company's potential market share in the industry it's trying to remake and start to dig into its possible profits.
"What are the margins that they're probably going to enjoy as a result of that?" he asked, describing the next stage of the process. "And then, most importantly, what kind of free cash flow do we think they'll be able to generate in the longterm, thinking about five years out?"
In an exclusive interview, Tauber said these three disrupter portfolio companies exemplify the special hidden potential he uses to supplement his approach.
One of the biggest Wall Street winners of recent years, Tauber says chipmaker Nvidia has become a success story for this exact reason. It's currently the second-largest position in the portfolio.
"When we first bought it five years ago, everyone was focused on the PC cycle," he said. "We were focused on the application of their graphical processing unit, or GPU, technology for things like artificial intelligence and autonomous driving and high-performance computing. And that's made the stock do as well as it has done."
(2) Beyond Meat
Plant-based meat maker Beyond Meat was an exceptionally hot stock a year ago, soaring from an initial public offering price of $25 to more than $230 last July. Nearly the opposite happened during the coronavirus sell-off, as the stock fell to some of the lowest prices since the IPO.
"We actually bought Beyond Meat in the end of March when the stock got as low as the mid-$50s," he said.
It's easy to understand why people were selling the stock then. Beyond Meat gets much of its income from restaurants like TGI Friday's and Carl's Jr selling its burgers, and restaurants were facing historic hardship. But Tauber says there's much more to the company.
"Wall Street was, in our opinion, overly focused on the fact that half their business is food service and was completely missing the fact that their grocery sales were through the roof," he said. The stock has jumped more than 160% from its March low of about $48.
Also under the radar is its continued progress in developing new plant-based meats that will allow the company to diversify its business.
"They are hiring the best food scientists in the world to focus on replicating animal proteins of all kinds," he said. "They're thinking about chicken, they're thinking about fish and they're getting closer and closer to having really interesting replicas, and that provides tremendous optionality for the story."
(3) Arrowhead Pharmaceuticals
While there's tremendous interest in Moderna's messenger RNA drugs, one of which is a potential COVID-19 treatment, Tauber says companies that are working along an opposite path are also very appealing.
He says Arrowhead Pharmaceuticals has great promise because of its RNA interference approach, and because it keeps finding ways to use that technology against additional illnesses.
"There's a tremendous level of optionality in terms of the companies that have good RNA interference platforms," he said. "[Arrowhead] keep coming out with new pipeline products because there's a very large supply of diseases that involve defective proteins that can be knocked down. … [S]o the pipeline kind of keeps expanding."
He adds that the RNA interference drugs can keep working for three to six months, giving them an advantage in convenience compared to most typical medications.
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