Buffalo Discovery: A Technology Fund in Disguise Barrons.

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Buffalo Discovery: A Technology Fund in Disguise - Barrons.com

Carlsen begins his process with a screen for growth"he starts with 12,000 companies and screens for those raising revenues and profits by at least 10% per year, three times the current estimate for U.S. gross-domestic-product growth. That narrows the universe down to 800. Then comes the technology and innovation part of the process: Carlsen, Brethour, and Jones look at each business in terms of its industry and in the context of broader trends. They look for businesses that can grow quickly, and without much additional expense. Discovery winds up with about 220 companies on its watch list, which is whittled to 70 stocks. The managers derive the best- and worst-case scenarios for each over the next five to seven years; Carlsen favors those whose best-case scenario is at least twice as good as its worst-case.

The fund's picks are all expected to benefit from important long-term trends that Carlsen's team has identified"for instance, technology's influence in the health-care sector, particularly when it comes to managing the cost of care. Hospira's inexpensive generic drugs and innovative delivery systems for injectable medication have enabled it to become among the world's largest distributors of generic injectable medicine. The firm, which has a $7.1 billion market value, fits Carlsen's criteria in another important way: Hospira's business comes with formidable barriers to entry, since injectable drugs are difficult to make and highly regulated. Similarly, top holdingAlign Technology(ALGN) is making the torment of metal dental braces pass?(C). Align makes clear, almost invisible, rubberized mouth liners created from digital scans of a patient's mouth. It has opened up the market for braces to a wider percentage of the adult population who would normally be averse to braces, while also appealing to teenagers. What's more, dentists like Align's bracesbecause they require less adjustment"and less chair time"making for fewer and shorter visits. The $4.3 billion company has enjoyed surprising revenue growth both in North America, its main market, and abroad. Revenue growth for its North American business, which accounts for 75% of sales, rose 13% last year, while sales in Europe were up 20%.

Buffalo Discovery FundTotal Returns*1-Yr3-Yr5-YrBUFTX37.7%17.0%28.1%S&P 50026.014.322.2% OfTop 10 HoldingsTickerPortfolio**Align TechnologyALGN 3.1%HospiraHSP3.0Chart IndustriesGTLS2.7AppleAAPL2.6Carbo CeramicsCRR2.4AccurayARAY2.1FacebookFB2.0PerkinElmerPKI2.0Gilead SciencesGILD1.9ActavisACT1.9Total:23.7%*All returns are as of 02/26; three- and five-year returns are annualized. ** As of 12/31/13. Sources: Buffalo Funds; Morningstar

Greater Internet accessibility increases the value of services like Facebook, which can then attract more advertising. Total online advertising amounts to $115 billion today, and is expected to grow to $230 billion in five years. Facebook's share of that, now 7%, could double to 14%, Carlsen says, producing annual revenue of $32 billion in five years, a compound growth rate of more than 30%. He bought and immediately sold Facebook at its initial public offering, then bought his current stake at $20. Facebook is still among the fund's top holdings, though Carlsen has been selling recently, as the stock closes in on his target of $78. Chart Industries(GTLS), a manufacturer of equipment that turns gas into liquid to make it easier to transport, can't keep up with demand. The introduction of hydraulic-fracturing technology has caused a boom in drilling, particularly in North Dakota's Bakken Shale formation. The liquefaction of natural gas is needed for transporting it for use in urban areas, as well as exporting to other countries.

Now at $84 per share, with a market value of $2.5 billion, Chart shares could hit $125, Carlsen says, adding that it's the only publicly traded company so directly tied to the natural-gas liquids build-out.

The innovators are out there. Like Carlsen says, it's a matter of discovery.? E-mail:editors@barrons.com http://online.barrons.com/article/SB50001424053111903713804579391203646242282.html