You might be surprised to see BlackBerry including in the category of innovative companies. But if you look ahead, there’s a “meaningful” long-term opportunity as BlackBerry wins contracts with companies working on automated vehicles, according to Elizabeth Jones, a co-manager of the Buffalo Discovery Fund which has a five-star rating from investment researcher Morningstar.
In a recent interview, Jones described how she and her colleagues uncover innovative mid-cap growth companies for the fund BUFTX, -0.56% The managers explore dozens of long-term industry trends, and one they’re participating in, Jones said, is “the substitution of capital for labor,” through which companies make investments in automation of streamlined processes to become more efficient. BlackBerry is a good example, Jones said, and offered two other companies that fit the theme.
BlackBerry
BlackBerry’s BB, -0.47% stock has declined 91% over the past decade, reflecting the loss of its once-dominant position for smartphones. But in the past two years, the stock has gained more than 50%, according to FactSet. Buffalo Discovery began investing in BlackBerry in May 2017.
BlackBerry said its sales were down slightly during its fourth quarter of fiscal 2018 ended Feb. 28 from a year earlier, but it was profitable. Jones believes the company is on a path toward sales growth in calendar 2019 in part because “it is developing software that will be critical for autonomous driving.”
Republic Services
Republic Services RSG, +0.63% is a waste management company that operates in 40 U.S. states. Jones said the company is at the forefront of using new technology for its services, including “automation with robotic arms to empty trash” into its trucks.
“We believe the next step over the next few years would be for the driver potentially not to be there, while the truck still has one person on it,” she said.
Republic Services reported an 8% increase in fourth-quarter revenue, while its operating income increased 4%. The company’s shares have risen 49% over the past two years, compared to a 37% gain for the Russell Midcap Growth Index.
Athenahealth
Before beginning her career as a fund manager, Jones was a pediatrician practicing at the University of Chicago Hospitals and worked for the U.S. Public Health Service. She said Athenahealth ATHN, -0.18% is “at the forefront” among companies providing cloud-based practice management systems to doctors. She believes it will expand its offerings eventually to include providing information systems to hospitals.
The U.S. was “pretty much behind the curve in terms of investing in IT solutions for health care,” she said, adding that several federal administrations have recognized the problem. ”To be reimbursed by Medicare and Medicaid, you need to meet these standards,” she said.
“Athena has roughly a 10% market share for electronic health records and about a 15% market share for practice management,” Jones said, adding that the company has “a huge opportunity to continue to grow by attracting doctors to a system that is interoperable and automated.”
Athenahealth’s fourth quarter revenue was up 36% from a year earlier, while its earnings more than tripled. The stock is up 37% over the past two years.
Fund performance and expenses
Here’s how the Buffalo Discovery Fund has performed against its benchmark index and Morningstar category:
| Total return - 2018 though April 17 | Average return - 3 years | Average return - 5 years | Average return - 10 years | |
| Buffalo Discovery Fund | 3.6% | 10.1% | 16.0% | 13.4% |
| Russel Midcap Growth Index | 4.0% | 9.6% | 14.2% | 10.3% |
| Morningstar Mid-Cap Growth Category | 4.3% | 9.0% | 13.2% | 9.2% |
| Sources: Morningstar Direct, FactSet | ||||
The performance figures for the fund are net of total annual expenses of 1.03% of assets, which Morningstar calls “average.” An interesting feature of the fund is that it only has one share class. Many funds have multiple classes, some of which have sales charges, and to avoid a sales charge and/or have a relatively low expense ratio, investors have to purchase shares through an adviser. The adviser in turn charges another significant annual fee as a percentage of assets. So the performance figures for those share classes don’t reflect a significant drag on performance.