Things are breaking in favor of manager Joseph Fath and the T. Rowe Price Growth Stock Fund ( PRGFX ) he manages. The $44.6 billion portfolio was outperforming 98% of its large-cap growth fund rivals tracked by Morningstar Inc. over the three months, going into Thursday.
That could help lift the mutual fund , which has been roughly in the middle of the pack so far this year, back to its longer-term record of outperformance, as Fath approaches his three-year anniversary at the helm in January.
Over the past three years the fund's average annual gain of 9.53% has topped 85% of its peers, which averaged 7.37% yearly. The S&P 500 notched a 9.18% annual pace.
The fund's recent rally stems from the market's rotation back toward the type of growth stocks that Fath favors. Earlier in the year, the market was rewarding deep cyclical stocks. "That's not an area we play," Fath said.
Fath prefers stocks with superior growth in earnings and cash flow, in good times or bad.
The fund's long-term success has made it one of IBD's Best Mutual Funds 2016 Award winners . It outperformed the S&P 500 over the one-, three-, five- and 10-year periods ended Dec. 31. Only 9% of U.S. diversified stock funds accomplished that. And it was in the top 100 in three categories: all U.S. equity, all growth funds and all large caps.
How is the fund managing this rebound? Eight of its 10 largest holdings as of Sept. 30 had IBD Composite Ratings of 83 or better. Five of its top 10 new buys also had Comp Ratings of at least 83.
IBD'S TAKE:The Composite Rating, which starts at 1 and runs to 99, combines IBD's five performance ratings. Stocks poised to move higher often have a Comp Rating of 95 or higher, which means that they've outperformed 95% of all other stocks in terms of their Composite Rating. Here's where to learn more about reading the Comp Rating road signs .
MasterCard ( MA ) is one the fund's top holdings. It has trended higher since early July, and it did well on Wednesday, the first day after Donald Trump's election victory. But it pulled back on Thursday, finishing 4% below its all-time high.
Illinois Tool Works ( ITW ) is among the fund's top buys. The stock has rallied this month, adding 8% this week. Many investors look at it as a way to benefit from investments in U.S. infrastructure under a Trump administration. Fath instead is focused on the stock's ongoing fundamentals, not its potential macroeconomic drivers.
"It's more of a mergers-and-acquisitions story within industrials," he said. "And it is a disciplined, well-run company with seven business units. They're all doing well, all pushing margin structure over 20%. Only the welding unit is under pressure."
Fath added that the company management has executed "good deployment of capital. They've gotten rid of bad stuff, focused on their best stuff and made good deals in recent years."
Another of his holdings, Martin Marietta ( MLM ), is more of a Trump infrastructure play, he says. The stock, which has an IBD Composite Rating of 94, gapped up 12% on Wednesday on massive volume and was up again Thursday. That puts Martin Marietta shares above the level at which you'd want to buy them under CAN SLIM rules.
IBD'S TAKE:CAN SLIM rules establish buy ranges above buy points to keep investors from "chasing" stocks beyond low-risk buy zones. Leading stocks executing powerful gap-up breakouts operate according to a slightly different set of rules.
The company produces crushed stone, and an other aggregates for construction.
Earnings per share grew 886%, 56% and 22% the past three quarters.
The company stands to benefit from programs like the Free and Secure Trade ( FAST ) program, which is a commercial clearance program for known low-risk shipments entering the United States from Canada and Mexico. "(Those programs) have been slow to roll out but are ramping up now," he said.
Also, Fath sees the company's low single-digit volume and high single-digit pricing as set to recover into high single-digit growth as the heavy rain and flooding in the Southeast that hurt them earlier this year have passed.
Many investors expect certain financial stocks to benefit from a lighter regulatory burden during a Trump regime as well as from a rising-rate environment. Morgan Stanley (MS) gapped up 7% on Wednesday and was up again Thursday.
Trading around 38, that left the big financial firm's shares extended above their 32.47 buy point.
"(A bullish outlook for a) lot of financials is predicated on a rising-rate environment," Fath said. "We think Morgan Stanley is a good company-specific story."
Fath likes Morgan Stanley's heightened focus on wealth management.
And the company's bank is becoming a bigger source of income and profit as the firm does more lending.
Ferrari (RACE) is another holding that Fath likes. The Italy-based sports- and luxury-car maker was spun off from Fiat just over a year ago.
"This stock does not get a lot of attention," Fath said. "European car analysts follow it. But it is really a luxury goods company. It does not have a lot of capital requirements and it does have a lot of demand backlog."
The company enjoys production growth of roughly 4% a year, Fath says. And it has annual pricing power of about 3% to 5%.
"This is a company that can grow in the midteens for the rest of the decade," Fath said. "Other luxury goods makers like Hermes trade at much higher multiples. In today's market, we like a company that can be defensive as well as offensive."
Generally, superwealthy consumers don't downshift their car buying even during a time of slow or uncertain economic growth, Fath says.