A fund manager has posted strong long-term performance by handpicking companies on the verge of explosive sales growth. Here are his top picks right now. Akin Oyedele Jun. 19, 2019, 12:09 PM

Brendan McDermid/Reuters

§ The biggest driver of stock-market returns has little to do with the

economic cycle, says James Callinan, portfolio manager of the Osterweis Emerging Opportunity Fund.

§ His fund has outperformed its benchmark since inception by

focusing on something else instead: companies that are tapping into themes where demand is poised to surge.

§ He recently shared the top three stocks he says should grow their sales and deliver above-market returns regardless of the economy's direction.

A recession is not the worst thing that can happen to an investor.

In fact, some fund managers have formulated strategies that are specifically designed to thrive even if the companies they've invested in are mired in the worst macro environment possible.

That's part of the strategy adopted by James Callinan, portfolio manager of the Osterweis Emerging Opportunity Fund, which has $108 million in total assets. Since its inception in 2012, it has returned 16% through the first half of 2019, handily beating its Russell 2000 Growth benchmark over the same period.

The fund's underlying strategy, according to Callinan, is to focus on the best secular-growth companies in individual markets instead of chasing firms that are benefiting from an expansionary cycle.

"In our view, the most important driver of equity returns, particularly for emerging companies, is the growth rate of demand for their products and services," Callinan said in a recent note.

He continued: "In our portfolio, we seek to invest in a select group of innovative companies that are able to capitalize on untapped, expanding markets."

At the turn of the millennium — and the height of the technology bubble — ecommerce could have been identified as one such expanding market. In fact, Callinan describes the boom of online shopping as "one of the great secular growth stories of the 21st century." The chart below shows just as much: Online sales as a share of total retail sales have been virtually unstoppable.

FRED

This trend achieved a landmark in February that would have sounded like a pipe dream in 1999. For the first time, online shopping had a greater share of sales than physical stores for the first time, according to Census Bureau data.

But Callinan would also be the first to tell you that no growth company or theme is fail-safe, including this one. For one, his emerging-opportunity fund has not yet passed through the fire of a recession. But he has a historical precedent to prove his point: A closer look at the chart above reveals that the upward trajectory of ecommerce sales stalled during the 2008 financial crisis, though it resumed near the end of the recession.

To identify such growth themes, Callinan devised three categories that companies are able to seize. He adds that it's possible for one company to be adopting technologies that fit into more than of these categories:

1. Foundational technologies that enable other companies to thrive. These include cloud computing, which enabled a company like Zoom to grow and float a blockbuster initial public offering.

2. So-called mousetraps that emerge on the scene and steal market share away from incumbents. There's perhaps no better example of this than Amazon, a company so capable of invading any industry that its name is also used as a verb.

3. Brand new products or services that solve problems that were previously unaddressed, sometimes because these issues never existed. Callinan uses Google's search engine as an example of something that wasn't needed before the internet became widely available but is now indispensable.

While there are probably dozens of companies that fit into these categories, the hard part is investing in the ones that are poised to deliver strong returns over the next few years. Callinan has shared his top three picks, listed below with his bull case on them:

Twilio

"Twilio is the industry leader, disrupting a large, legacy communications market - Gartner estimates that $1.4 trillion is spent on communications, over four times the amount spent on enterprise software. Over time, we believe that a meaningful portion of the $1.4 trillion will migrate from hardware and network centered products to communication solutions integrated into software applications.”

Inspire

"Inspire is a medical technology company that manufactures a treatment for people with moderate-to-severe Obstructive Sleep Apnea who are unable to use or get consistent benefit from traditional CPAP machines. We believe this is a classic emerging secular growth opportunity, as the company is already the leader in its space, but it has only achieved limited penetration thus far.”

Avalara

"Avalara is a software company that allows vendors to more efficiently address a very boring and traditional problem - sales tax.

Additionally, Avalara is a cloud-based application, which reduces its IT overhead and should steepen the adoption curve. The company is a leader in its space, and barring the entry of newer, tougher competitors we feel they are very well positioned to continue their rapid growth."

OSTERWEIS EMERGING OPPORTUNITY FUND

Business Insider With respect to this reprint, please note the following: The attached article has been reprinted with the permission of Business Insider. The original article was first published June 19, 2019. The Fund’s average annual total return for the one year, three year, five year and since-inception periods ending 6/30/2019 were as follows:

1 Year 3 Year 5 Year Since

Inception (10/1/2012 )

Osterweis Emerging Opportunity Fund 10.67% 23.54% 14.21% 16.37% Russell 2000 Growth Index -0.49 14.69 8.63 12.55%

Gross/Net expense ratio as of 3/31/2019: 1.25% / 1.13%. The Adviser has contractually agreed to waive certain fees through June 30, 2021. The net expense ratio is applicable to investors. Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted above. Performance data current to the most recent month end may be obtained by calling toll-free (866) 236-0050. Performance prior to December 1, 2016 is that of another investment vehicle (the “Predecessor Fund”) before the commencement of the Fund’s operations. The Predecessor Fund was converted into the Fund on November 30, 2016. The Predecessor Fund’s performance shown includes the deduction of the Predecessor Fund’s actual operating expenses. In addition, the Predecessor Fund’s performance shown has been recalculated using the management fee that applies to the Fund, which has the effect of reducing the Predecessor Fund’s performance. The Predecessor Fund was not a registered mutual fund and so was not subject to the same operating expenses or investment and tax restrictions as the Fund. If it had been, the Predecessor Fund’s performance may have been lower. Opinions expressed in the article are those of the author and portfolio manager. These opinions are subject to change at any time, are not guaranteed and should not be considered investment advice. The Osterweis Funds are available by prospectus only. The Funds’ investment objectives, risks, charges and expenses must be considered carefully before investing. The summary and statutory prospectuses contain this and other important information about the Funds. You may obtain a summary or statutory prospectus by calling toll free at (866) 236-0050, or visiting www.osterweis.com/statpro. Please read the prospectus carefully before investing to ensure the Fund is appropriate for your goals and risk tolerance. Mutual fund investing involves risk. Principal loss is possible. The Osterweis Emerging Opportunity Fund may invest in unseasoned companies, which involve additional risks such as abrupt or erratic price movements. The Fund may invest in small and mid-sized companies, which may involve greater volatility than large-sized companies. The Fund may invest in IPOs and unseasoned companies that are in the early stages of their development and may pose more risk compared to more established companies. The Fund may invest in ETFs, which involve risks that do not apply to conventional funds. Higher turnover rates may result in increased transaction costs, which could impact performance. From time to time, the Fund may have concentrated positions in one or more sectors subjecting the Fund to sector emphasis risk. The Fund may invest in foreign and emerging market securities, which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks may increase for emerging markets.

The Russell 2000 Growth Index is a market capitalization weighted index representing those stocks within the approximately 2000 smallest companies in the universe of U.S. equities that exhibit growth characteristics. This index does not incur expenses, is not available for investment and includes the reinvestment of dividends. While the fund is no-load, management fees and other expenses still apply. Please refer to the prospectus for more information. As of 6/30/2019, the Fund’s top ten holdings as a percentage of total assets were:

Holding % of Total Portfolio Enova International Inc 4.2 Alteryx Inc - Class A 3.9 Planet Fitness Inc. - Cl A 3.7 Rapid7 Inc. 3.5 Ehealth Inc 3.5 Tabula Rasa Healthcare Inc 3.2 Etsy Inc. 3.2 Quinstreet Inc 3.1 Insulet Corp 3.1 Vericel Corp 2.9

Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security. Current and future holdings are subject to risk. Further information about the Fund’s portfolio allocation as of the last day of the most recent calendar quarter is available by visiting www.osterweis.com. Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC. [40069]