The following has been excerpted:

Some people think investing is all fun and GameStop. You know who you are. And if you’re looking to find another short-squeeze candidate, you won’t Reddit here.

The third and final installment of the annual Barron’s Roundtable instead deals with a seemingly increasingly arcane form of investing—the kind that draws upon rigorous analysis of company fundamentals and equity valuations. It was practiced in ancient times—say, about three weeks ago—when we convened our annual Roundtable of celebrated stock pickers to parse the outlook for the economy and financial markets in the year ahead. Integral to the gathering, which took place on Jan. 11 and Jan. 12 via Zoom, were presentations by each of our 10 panelists featuring their best investment ideas for 2021.

This week’s Roundtable package showcases the recommendations of James Anderson, Abby Joseph Cohen, Henry Ellenbogen, and Todd Ahlsten, whose commentary crackles with references to scale builders, network creators, and long-term compounders—in other words, companies in the vanguard of the digital revolution. Even storied enterprises like Deere (ticker: DE) now fit the new-age mold, thanks to technological advances that promise to enrich customers and shareholders alike.

James, head of global equities at Scotland’s Baillie Gifford, is a growth-stock believer with a long investment horizon and a stellar track record. He often ventures where others fear to tread. These days, that means China, as he eloquently explains in his defense of Tencent Holdings (0700.Hong Kong), the Chinese internet giant.

Abby, an advisory director and senior investment strategist at Goldman Sachs, technically doesn’t pick stocks; she picks the companies on Goldman’s Buy list that best reflect her investment themes and economic views. This year, her search for dividends and post-Covid recovery plays takes her to Germany, Japan, India, and China, along with the U.S., where stocks like Prologis (PLD), an industrial REIT, nicely fit the bill.

Henry, chief investment officer and managing partner of Durable Capital Partners, looks for companies built to last, as his firm’s name implies. Some he has owned and nurtured since they were pups in the private market. All are disrupters in their market segments, and, like digitally native used-car seller Vroom (VRM), could enjoy many years of potentially spectacular growth.

Todd, chief investment officer of Parnassus Investments and lead manager of the Parnassus Core Equity fund (PRBLX), marries stellar stock-picking with ESG, or a focus on environmental, social, and corporate governance issues. The union has produced a winning portfolio with eclectic names—including Applied Materials (AMAT), Booking Holdings (BKNG), and Deere.

Clobbering short-sellers might be fun for some. But investing in the underpriced shares of innovative, fast-growing companies could yield better returns in the long run.

Barron’s: James, where do you see the most inviting opportunities this year?

James Anderson: In listening to people speak here and elsewhere, I have detected a delightful whiff of fear and foreboding about a particular set of assets—namely, Chinese equities and technology companies. I think the fear is hugely overstated, so my first pick will be Tencent Holdings. Tencent is far more aware than Alibaba Group Holding [BABA] that there are lines they shouldn’t overstep [with regard to China’s government]. Tencent is stylistically a very different company, with deeply appealing aspects.


Illustration by Helen Green


What they’ve done in the gaming business has been remarkable, and unmatched by their American peers. We would expect Tencent’s gaming revenue to go from a $20 billion run rate to a $50 billion rate over the next five years, and for profit margins to be at least unchanged at around 40%. The $730 billion market cap probably reflects the gaming business alone, leaving out the messaging app WeChat and other assets.

With the possible exception of [AMZN], Tencent has been the best capital allocator, reallocating its capital in the technology-platform world, from a 20% stake in Meituan [Hong Kong] and a 5% stake in Tesla [TSLA], two of my picks last year, to a 12% stake in Snap [SNAP]. These are only a few examples. Tencent has also done a fantastic job in guiding the companies in which it is invested. The market cap hugely underestimates the value of the company, and the discount is underpinned by the deep fear and, I think, resentment of China’s success that currently exists in most of the Western world.

Henry Ellenbogen: How do you think about Tencent’s fintech opportunity, and about fintech regulation in China generally?

Anderson: First, we didn’t get the impression that Tencent was entirely surprised by what happened at Ant Group. [The Chinese government halted the initial public offering of fintech giant Ant in December, amid concerns about the company’s risks.] Second, Tencent’s fintech service is so intrinsic to the appeal and utility of WeChat that isolating it might be dangerous. I don’t think it will become dominant, or that it is frightening from the point of view of the state.

Next, ASML Holding [ASML] is also one of the stocks I recommended at last year’s Roundtable. It is the only one for which the case has gotten considerably stronger relative to the share price. ASML is probably the most important company in the world to the development of the internet, big data, autonomous driving, and much else. [ASML makes lithography systems used in semiconductor manufacturing.] Without it, Moore’s Law wouldn’t exist. ASML is an earned monopoly.

James Anderson's Picks

Source: Bloomberg

The central problem of Intel’s [INTC] several problems is that it didn’t follow its road map for EUV [extreme ultraviolet] technology. It also made the mistake of walking away from a deep involvement with ASML, and is now seeking help from TSMC [Taiwan Semiconductor Manufacturing (TSM)], an acknowledgment of that error. Second, China regards ASML and TSMC as the only two companies it can’t replace. Demand for semiconductors is growing in both the short run and on a secular basis. The industries of the future, from AI to autonomous driving, are going to have much more semiconductor intensity. Prices will rise as it becomes clear that ASML is an essential company for the working of the world.

The U.S. is trying to keep even companies that make technology tools from working with China. Can ASML avoid getting pulled into this conflict?

Anderson: ASML is fighting hard to avoid it, but the world can’t function without the magic of advanced semiconductors. The fight between the U.S. and China won’t destroy the power of ASML’s market position.

ASML is based in the Netherlands. I’ll stick with Europe for my third recommendation. Henry talked yesterday [during the first Roundtable session on Jan. 11] about the meal-delivery company DoorDash [DASH]. I’ll throw you Delivery Hero. It is the largest delivery company in the world outside of Meituan. Delivery Hero [DHER.Germany] has a market cap of about 27 billion euros [$33 billion] and operates in almost 50 countries. It is the dominant player in most of them. It is run from Berlin, which is more tech-knowledgeable than most of the traditional German manufacturing centers. That allows for greater autonomy, which has allowed them to make a good series of acquisitions at very low prices, including, most recently, in South Korea.

Delivery Hero is also pushing into the delivery of groceries and other essential services, which will be very important in coming years. The geography of distribution will favor both people getting goods at home and from small, local centers. We have great admiration for the management, including the CEO, Niklas Östberg. The company has the ability to compound growth in the next 10 years at 30% to 40%, and eventually get to at least 50% gross profit margins. Relative to DoorDash [with a market capitalization of $60 billion], Delivery Hero looks extremely undervalued.

Ellenbogen: Can you talk about what they are doing in grocery, and how they are using their delivery apparatus to access other local commerce, and how important that is to your thesis?

Anderson: It probably doubles their potential market. They now have grocery delivery in 41 countries. Their model is different from that of Amazon; everything has to be delivered within an hour, a skill compatible with restaurant-food delivery. Effectively, getting there first gives you a better chance of enjoying a local oligopoly.

Ellenbogen: We are thinking along the same lines. The mental model that U.S. investors had about the food-delivery space was driven by their understanding of the car space—Lyft [LYFT] and Uber Technologies [UBER]—as opposed to what Meituan had done in China. But when you realize the importance of food as a frequency asset to drive scale in the offline world, you realize how that can move into groceries and other local goods. Over time, people will realize that this is an even better business model, with a bigger end market than they thought.

Anderson: Delivery Hero says it has learned some tricks from Meituan, but that it is working in markets with just as much inherent growth and urban concentration as Meituan itself enjoys. Over half of its business is now in Asia; South Korea is possibly the most attractive market. The geography in which Delivery Hero has become dominant is very appealing.

Ellenbogen: I’ll make just one more comment: If I ask a local merchant in Washington, D.C., how much it would cost to ship me something overnight by FedEx [FDX], it’s $20. DoorDash can get it to me within an hour for $8. The network DoorDash is building doesn’t exist in the physical world.

A year ago it seemed DoorDash might never be able to go public. Then its IPO was a massive success. Was it simply COVID that changed the opportunity and value of these companies, or did we not fully understand the business model?

Anderson: Meituan proving it could be profitable, which came about before COVID, was very important.

Ellenbogen: We led a private fundraising round for DoorDash in the first half of 2020; the company raised around $15 billion. What market commentators didn’t realize is just what James is talking about: Meituan had gained a 50% market share in first-party delivery, and had the ability to broaden into other delivery areas. DoorDash is basically the same story. It has topped a 50% market share in the food-delivery marketplace business, and also has a big and fast-growing business doing third-party delivery for other companies. The long-term competitor to DoorDash is Amazon, but for a whole bunch of reasons, many retailers don’t want to give Amazon their data. Thus, DoorDash is in the pole position.

Illustration by Helen Green

Anderson: Now I will come to America, where health-care investment opportunities are more appealing than what we find internationally at the moment. At some point, it was inevitable that two exponential trends—genome-sequencing costs collapsing and machine learning and AI being applied to health care—would finally begin to have an effect. They are just beginning to translate into real outcomes for the benefit for patients.

Illumina [ILMN] has been a frustrating stock to own. The business hasn’t exploded in the way we would have hoped early on. Last fall, Illumina announced it was buying Grail, a pioneer in liquid biopsies for cancer detection. Testing started with Britain’s National Health Service [NHS]. We have reached the extraordinary point where the combination of gene sequencing and machine learning is giving us insights that run well ahead of our understanding of human biology. This will give Illumina access to vast new markets. It is also making the company run itself more aggressively. This will push it to gradually move away from giving quarterly earnings guidance and maintaining optically higher returns in the short term. We feel very strongly about the outlook for the next 10 years.

“People aren’t grasping Moderna’s ability to keep replicating what it has done in the one-off COVID saga, and not only in vaccines. Moderna is the most culturally different and identifiably ambitious company that I have come across in health care in a very long time.”

— James Anderson

Moderna [MRNA] is the second version of this. The way Moderna has developed a vaccine without even having the virus in their lab is astonishing. But there is a big misunderstanding between the wonders of the company’s COVID vaccine and its long-term opportunities. Moderna has the potential to lead the world in treatment of the four big killers: autoimmune disease, cardiovascular disease, cancer, and infectious disease. The CEO, Stéphane Bancel, seems to have realized that the traditional biotech model, let alone that of Big Pharma, simply doesn’t work. He is determined to make improvement not marginal, but tenfold. He has brought a Silicon Valley-type attitude to drug development. He wants to prove that success in biotechnology is replicable and abundant.

People aren’t grasping Moderna’s ability to keep replicating what it has done in the one-off COVID saga—and not only in vaccines. Moderna is the most culturally different and identifiably ambitious company that I have come across in health care in a very long time.

James, Tesla has returned 700% since you recommended it last January. What do you think about the stock now?

Anderson: I wasn’t expecting that sort of return, but what it is telling you is that, whether in electric vehicles or primary energy, electric and renewables have won. We are still owners of Tesla, but one has to be cognizant of what has happened to the valuation.

Have you taken profits?

Anderson: In some cases, yes. This is mostly because clients have risk guidelines that limit the percentage of any one stock in their portfolios.

Aside from those guidelines, how do you decide to sell a stock?

Anderson: We try to have a rigorous probability-adjusted upside, and rank our holdings in relation to that. We try to be fairly disciplined about developing an upside view over the next five to 10 years.

Thank you, James.

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