Smaller entrepreneurial companies are faster to innovate than big companies, said one fund manager. Here are three of his stock picks that have significant growth potential in their niche markets.
It's rare to find large companies that can really innovate, Michael Lippert, portfolio manager at Baron Opportunity Fund, told CNBC's "Squawk Box" on Monday. Apple has been innovative, but without Steve Jobs the market has yet to see if it can keep up the pace, he said. And Google—one of the few large companies that still innovates—has been forced to acquire to supplement its own innovation, he added.
Lippert's Baron Opportunity Fund has $387.8 million in assets under management and is investing into high growth innovative businesses that are generally mid-size companies.
"These companies, they are more focused," Lippert said, "they are better able to attract talent and generally tend to be the innovators."
"Guidewire is a small, nimble, entrepreneurial company that focuses on the P&C insurance space," Lippert said. He explained that property and casualty insurance companies generally use 30-year old software and that Guidewire provide more modern systems.
Guidewire has less than $200 million in recurring revenues, and Lippert sees that at least $1 billion recurring revenue as a very achievable target. Guidewire's stock rose 16 percent in the past year and was one of the fund's top five holdings as of the end of the February.
Another technology-related stock pick is Gartner—the company provides research and analysis on new technological trends. Gartner sells its consulting services under a subscription model and its typical subscriber has a budget of at least $1 million.
"What we really like about Gartner is that they are very much in the early stage of their opportunities," Lippert said. The company has almost 9,000 customers today, but the growth opportunity is big—there are over 100,000 businesses with an IT budget of $10 million or more, he said. The stock was also a top five holding and gained 26 percent over the past 12 months.
The third stock—Polypore—is a "controversial stock" for investors with much longer range outlook in mind, Lippert said. The company makes separators that go into lithium-ion batteries and it has unique technology for the large format cells that go inside cars, the fund manager explained.
"Polypore has some great technology that might have prevented what happened with Boeing, but they do not sell to Boeing right now," Lippert said. Polypore's shares gained more than 13 percent in the past 12 months.
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"The company is going to earn $2 this year according to Wall Street, they built capacity that would allow them to get to $4 of incremental earnings, so total of $6," Lippert said. This projection is based on a belief that over the next 5 or 10 years around 4 percent of the world's cars will have some form of electrification, with most of those coming from hybrids, the fund manager said.
Baron Opportunity Fund gained 5.2 percent year to date, as of the end-February, and 7.8 percent in five years, according to the asset manager's website. The fund has Verisk Analytics, Ansys and Equinix in its top five holdings as well.
-By CNBC's Anna Andrianova; Follow her on Twitter
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