July 30, 2004 — The T Rowe Price New Horizons Fund (PRNHX) invests primarily in small companies, but its portfolio is far from petite.
John Laporte, who has managed the $5.4-billion fund for nearly 17 years, typically has stakes in 250-300 companies.
Because small stocks tend to be riskier and more volatile than large ones, Laporte has “felt that it’s prudent to spread the bets over a broader number of names, so that the fund won’t get hurt real badly if any one company falls short of expectations,” he said in a recent interview.
Covering a lot of ground hasn’t kept the fund from outrunning its rivals over the short and the long term. T. Rowe Price New Horizons was up 7.3% this year through June, versus 3.4% for both the average small-cap growth fund, and the Standard & Poor’s 500-stock index. For the ten years ended in June, Laporte’s fund returned 13.4% on average, compared to a gain of 9.5% for its peers, and 11.8% for the index.
Laporte hunts for companies that increase their bottom lines by at least 15% per year, preferably consistently, although he’s willing to accept cyclical growers, and others whose profits fluctuate. He also likes to see above-average returns on equity and invested capital, and solid free cash flow.
As for multiples, Laporte said he wants to buy “the fastest possible earnings growth” for the most reasonable price he can.” If he’s confident that a company will churn out strong profits steadily, he’s willing to pay “what might appear to be a high valuation at the outset.”
Laporte starts out trawling for companies with market caps of less than $1.5 billion, but won’t sell them if they grow to become large caps as long they keep putting up winning numbers.
For example, the he has owned Apollo Group`A` (APOL) since it went public in late 1994. The company, which provides higher education programs to working adults, now has a market value of $15.5 billion.
“A poor way to manage a portfolio is to set an arbitrary market capitalization number at which you will automatically sell a stock,” Laporte said. “It can cause a portfolio manager to sell some of their best companies way too early.”
Apollo, the fund’s No. 1 holding at the end of the second quarter, exemplifies what Laporte looks for in an investment. The company has been compounding earnings at a rate of better than 40% annually since its IPO, he said. In addition, it is the top player in the rapidly growing field of online education through its Apollo Grp-Univ Phoenix Online (UOPX) subsidiary, he said. That unit’s stock ranked fifth in the portfolio at mid-year.
Behind Apollo in the portfolio at that time was Schein (Henry) (HSIC), a distributor of medical and dental supplies. Laporte, who has owned the company for about 10 years, said it sports earnings growth of around 15%, compared to a growth rate of 6%-7% for its peers. He is also enthusiastic about Schein’s management team, which has helped boost profits partly through a string of good acquisitions, he said.