Big Ideas, Small Stocks

35% for its benchmark, the Russell 2000 Growth index. Its median 12-month sales growth is 17%, versus 9.5% for the index. Take Cognex (CGNX). Founded in 1981, it’s a leading supplier of machine-vi- sion products for industrial applications. The company initially benefited from the semiconductor boom, but “in 2000, 61% of its revenues were related to semiconduc- tors and today, only 4%,” says Zhang, who initially invested in the stock in February 2015 when it was in the high $30s; it was recently at $110. “They have evolved their core technology over time and are moving into new markets, like consumer electron- ics, industrial 3-D products, and airport security ID.” The company’s $585 million in revenue for the past 12 months is a fifth of what Zhang figures is a $2.9 billion total addressable market. Cognex has no debt and 29% net margins, she says. It’s a similar story for Veeva Systems (VEEV), which was founded in 2007 and went public in 2013. The company started with customer-relationship management software for the life sciences industry, but now offers a content-management platform that life sciences companies use to store, search, track, and share data, such as from clinical trials. “They’ve started with life sci- ences, but this platform can be used for any regulated industry,” she says, noting that Veeva has $618 million in revenue for what she says is an $8 billion total market. “They are just scratching the surface.” Both segments offer high recurring revenue and a competitive moat; switch- ing systems is costly and time-consuming. Veeva has 22% operating margins, no debt, and $725 million in cash. Zhang says Ve- eva should have no problem delivering 20% revenue growth over the next three to five years. Another top-10 holding, Insulet (PODD), is building on its proprietary Omnipod in- sulin-management system, which delivers to Type 1 diabetes patients continuous doses of insulin via tubeless pumps and disposable pods. Zhang points to several growth catalysts, including the potential

for Medicare and Medicaid reimburse- ment; a recent shift to direct sales in Eu- rope; and research into other applications, such as chemotherapy. Also: a partnership with Eli Lilly to develop pods for Type 2 diabetes, which is far more prevalent than Type 1. “That could launch in the first half of 2019,” Zhang says. Shares in Shopify (SHOP) have more than doubled over the past year, but this go-to e-commerce platform for small- and medium-size businesses has yet to reach its full potential. “This is a way to invest in the fickle consumer,” says Zhang. The com- pany, started in 2004 when its founders set out to start a snowboarding equipment site and found a dearth of e-commerce tools, has no debt and garners nearly half of its revenue from recurring subscriptions. Shopify has an $11 billion market value, which puts it in large-cap territory, but its potential to grow its $509 million in reve- nue warrants a spot in Zhang’s fund, which took a meaningful position early this year when it was trading in the $50s. “It’s rare to have a company that not only has very robust unit growth, but is also growing its wallet share, or revenue per customer,” says Zhang. While its core customers are small bricks-and-mortar companies that use its services for everything from web design to payments, Shopify is attracting larger enterprises, including GE, Nestlé, and Red Bull, via Shopify Plus. This speaks to what Zhang says she likes most about investing in small com- panies: seeing the potential in something and “watching it blossom.” That’s how she views her first decade in the U.S.: “People saw potential in me and invested in my ed- ucation.” In 2015, Zhang approached her former college advisor to establish the AYZ Schol- arship for incoming freshman from un- derrepresented populations who intend to study science, technology, or mathematics. Though the advisor still teases her about changing her major, “I think he has for- given me,” she laughs. “He’s even invested in my fund.” n

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peers in that period, according to Morn- ingstar. Zhang taps into Alger’s central re- search group, but works closely with her own team of three analysts and a research associate. Though all generalists, they have expertise in sectors that are the primary focus of this fund: technology, health care, consumer discretionary, industrial growth, and financials (namely fintech). Investors, Zhang says, shouldn’t con- fuse small-growth companies with start- ups. Most of the companies in her portfolio have at least a decade of operating history and stable revenue, but are undergoing positive dynamic change—such as a new product or beneficial trend—that offers the potential to double their revenue within five years. “We want high growth and high quality,” says Zhang, who was a small-cap portfolio manager at Brown Capital Management prior to joining Alger. The fund’s weighted median debt-to-capital ratio is 4%, versus

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