Here's how to spot a good growth stock, according to one fund manager

Published Sun, Mar 26 20238:48 PM EDT

Growth stocks have been enjoying a rebound after a miserable 2022. And the tech sector in particular — a favorite among investors seeking exposure to growth stocks — has been a bright spot amid the banking turmoil. The tech-heavy Nasdaq Composite has gained about 5.8% since March 10, as the collapse of Silicon Valley Bank reverberated through the market. That's bigger than the 2.3% gain in the S & P 500 over the same period. But Ian Mortimer isn't too concerned about whether the market is up or down at the moment. "We are taking a longer-term view. We are sort of taking a three-to-five year [view]. We are not trying to trade weekly or daily type of price movements," he told CNBC Pro Talks on Wednesday. Mortimer manages the growth and innovation-focused Guinness Global Innovators Fund, which counts the likes of Nvidia , Applied Materials and Microsoft among its holdings. "As a growth manager … one of the things we're trying to think about is, how do you identify good growth businesses?" he said. "Because ultimately what we're trying to find are companies that grow faster than the market. That's the types of companies that will outperform," he added. How to pick the right stocks Mortimer adopts a two-pronged approach to picking stocks. The first part of the process involves identifying companies with exposure to themes that he said he believes have "strong pathways for growth." But not all innovative or exciting companies make for good investments, he cautioned. To sieve out unsuitable companies, Mortimer applies a bottom-up analysis that leaves only those with earnings, and which do not require "significant" leverage. Mortimer said it's important to apply "valuation discipline" in evaluating potential investments. He said one of the biggest risks of growth investing is paying too much today for future growth. Future growth is very difficult to predict, he said, adding that historical growth isn't particularly indicative of future growth. "So, what you want to be careful of is if you chase a stock up and predict very high future growth, the risk is then you get a significant derating if that growth is not as high as expected," he said. Mortimer cited Wall Street research that showed outperforming companies were not only profitable, but also trading cheaper than the market. These companies ultimately went on to increase earnings at a much faster clip and had a multiple re-rating that drove up their share prices. "What we will argue is, if you look at a core equity growth portfolio, that valuation discipline becomes extremely important for your overall long-term returns. And it doesn't necessarily preclude you from finding some of those really exciting businesses that can increase in value significantly," he said. "It's about lowering the risks of your investment from the downside, against maximizing the upside. I think that balance is extremely important," Mortimer added.