The transition is over. Henry Ellenbogen, who succeeded Jack
Laporte at the helm of T. Rowe Price's $16.2 billion New Horizons
Fund on March 1, 2010, has fine-tuned the portfolio into his
So far, so good. Under Laporte, the fund's average annual gain
of 9.6% over more than 23 years ranked in the top 29% of its
small-cap growth peer group. Ellenbogen has racked up a 22.97%
average annual gain. That's in the top 1% of its direct rivals as
tracked by Morningstar Inc.
Ellenbogen, 41 years old, talked about
with IBD from his Baltimore office.
Not all of your growth stocks are alike, are they, Henry?
We want to invest in small companies that can become big and use
the power of compounding to work for our investors.
Underlying that, we hold two types of companies.
One, about 30% of the portfolio, is in early-stage companies
that are often characterized by large market opportunities. They
have a strong market position, although in immature business
models. Their competitive barriers haven't formed yet.
The second type, about 60% of the portfolio, is in companies
that have durable growth. They're typified by companies that do
have strong competitive positions. They may have a business
innovation. They may be in mundane areas of the economy but doing
things differently, which gives them an advantage. They have
strong management who understand how to continue to build a
competitive advantage and reinvest cash flows and continue to
drive strong growth.
Like Jack Laporte (who passed away in August 2013), do you let
We take lessons from Jack Laporte and also from "Cub" Harvey
(Curran Harvey Jr.), the former president of T. Rowe Price
(1980-84), who also died late last year and was president and
lead portfolio manager of New Horizons for several years
(1969-74) and also CEO of T. Rowe Price (1981-84).
Like Jack, we still want small companies. We still share the
view that compounding is (the) investors' friend.
I looked at rolling 10 years in New Horizons. What you see is
20 total stocks over 10 years that drove outperformance of the
whole portfolio. Not 20 every year. Twenty over the entire 10
I looked at a study of companies that start small but compound
at an average of 20% a year for 10 straight years. What's
stunning is that there is a total of 18 companies that do that.
And it's only 11 unique companies, because some companies
) orFlowers Foods (
) repeat on the list.
A lot of the time, the hardest thing is to not sell a company
because it gets fairly valued or in the short term overvalued. It
takes discipline. That lesson in compounding is a fundamental
tenet we share with Jack.
You target private companies more than Laporte did, right?
By spending time on early-stage companies, we do better in
early-stage companies but also in durable-growth investments. Our
focus on that is more than our predecessor.
We've done five to seven private investments a year. It's a
relatively small amount of capital. But over time we think it
pays off for our shareholders. We were private investors
) (an online retailer for mothers) andGrubHub (
) (an online and mobile food-ordering platform), just to name
And you have more appetite for global leaders than Laporte did,
That's correct. On the global side, the best companies are strong
in multiple markets. Given a choice between a company dominant in
one market or strong across multiple markets, I'll choose the
Also, as the world becomes smaller, innovation is not a
monopoly of people in the United States.
Any plans to reopen the fund, which closed to new investors on
We felt in the short cycle that small-cap valuations were
stretched. For about a year before we closed, we looked at the
50-plus-year history of the fund. This is the oldest data set on
small caps in the country, by the way. When we looked at relative
valuation metrics, we were at significantly stretched valuations.
Price-to-book, price-to-earnings, price-to-sales -- all were near
all-time highs. With lower-quality companies coming to public
markets (for IPOs) and the narrowness of what's going on, we felt
it was not a good time to be taking additional cash flows. We
have no plans to reopen at this point. Since we closed, small-cap
growth has been the worst sector of the market.
Alexion Pharmaceuticals (ALXN) got clobbered in the biotech
sell-off. Do you still like it?
It's rare for us to own a $30 billion market company. We bought
it when it was a small cap. Alexion is best-in-class in
management. They run the business well. We like continued
prospects for them. That's what we're focused on.
Elaborate on Chipotle, please. In this broad market correction,
Chipotle is among those selling off. Why do you like it?
This is almost a classic company that in the short cycle is
relatively fairly valued. But what really underlies its strength
is its business-model innovation (in quality ingredients,
flexible menus, fast service and catering).
They combine efficiency in their stores to get best-in-class
margins and combine empowering consumers to customize the mass
dining experience. And in (co-CEOs Montgomery Moran and Steve
Ells) you have a terrific team. One controls food and integrity
of the dining experience. The other is good at operations. We see
best-in-class returns and a strong runway for growth.
DoesPriceline (PCLN) epitomize the sort of innovator you
Actually, we inherited it. We were significant shareholders in
Kayak. Priceline bought Kayak. Once we got Priceline, we decided
it has a unique business model and growth in front of it.
Their Booking.com asset benefits from global network effects.
The more hotels you have in your network, especially because of
the cross-border strength of travelers, that allows you to
provide better monetization to your hotel partners and better
supply to consumers.
They're superior at marketing, both from understandingGoogle
(GOOGL) and understanding hotel reviews. Even though they've been
following the same formula for almost 10 years, they still have a
runway in front of them.
What's your view ofOpenTable (OPEN), which you've trimmed in
Our sales (of the stock) reflected some of the risks. Some areas
of the small-cap market are overextended, so we eliminated a
number of Internet and consumer holdings. But OpenTable is one we
want to hold.
Recently the company has done a good job of reinvigorating its
product innovation. New product innovation can unlock areas of
growth. Their new product is focused on better content. And
they're investing in more customer acquisition. And they're
working on allowing diners to pay in a seamless way. Basically,
it would allow each consumer to have a tab at every restaurant he
The new product is a cloud offering, which will provide a
better overall view of restaurants and the habits of their
diners, helping to optimize the overall network.
What's the appeal ofManitowoc (MTW), a crane manufacturer?
There are two parts of the business. In their crane business,
they're a blue chip. They not only have a cyclical recovery in
front of them; they've also made improvements which the market
does not give them credit for.
They also have a food equipment business, which is a solid
asset. They've done some heavy lifting to make it better.
Why have you been building your stake inRexnord (RXN)?
There are two parts. The underlying assets are strong. One asset
is Zurn, a very good plumbing supply business.
may not be giving it enough credit because we're at a bad point
in the construction cycle. But they've done things to expand
their scope and improve quality. They have good people and a
capital acquisition culture that can continue to make smart
What's your outlook onPalo Alto Networks (PANW), which you
Palo Alto is an early growth cycle company. They have a superior
offering. We bought this when there was stress around it: its
lawsuit withJuniper (Networks) (JNPR). What's going on with
cyberterrorism creates demand (for Palo Alto's
Harman International (HAR) has held up fairly well in the
correction. What's your view?
They're basically the market leader in high quality audio and
infotainment and navigation systems in cars.
Secularly, we see penetration of information systems in cars.
They have been at the high end. But they've taken costs out,
which lets them go into midsize cars.
Second, in general there was concern that they were competing
with cell phones. We believe they complement cell phones.
Finally, they have many years of backlog, so the visibility of
this business is high. Cash flow has gotten better, based on
(the) efficiency and skill of management.
What's drivingSignature Bank (SBNY), which has four quarters of
accelerating earnings per share growth?
They bring in the best-in-class (financial services) teams, marry
them with best-in-class infrastructure and empower them better
than their big competitors, which are large money center