Lori Keith's mutual fund has grown 98,000% in 12 years by focusing on unflashy companies. She told us about 7 such stocks that thrived in the recession — and will do even better in the recovery.

  • Lori Keith has established a 12-year track record of outsize returns at the Parnassus Mid-Cap Fund without investing in flashy, explosive growth names.
  • That's helped her mutual fund grow from $6 million at the start of her tenure to just under $6 billion today.
  • Keith said she prioritizes quality, durability, and visibility, and gave seven examples of companies that illustrate what she looks for.
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Investors don't always reward a "slow and steady wins the race" approach. But Lori Keith has been good enough and steady enough for long enough that they've noticed.

For the last 12 years Keith has been the co-manager of the Parnassus Mid-Cap Fund (formerly The Parnassus Fund) with Matthew Gershuny. They specialize in buying stock in companies that are on track for above-average revenue and profit growth, and look like they'll keep it up and keep getting better. 

"That may not be the high flyers that many investors are piling into, but these are companies that are really focused on durable growth," she told Business Insider in an exclusive interview. "There's a multi-year runway with good visibility into the earnings stream."

An investment of $10,000 in the fund at the start of Keith's tenure would have become $37,377 today, according to Morningstar. Keith says the quality of these under-heralded companies, including strong free cash flows and healthy balance sheets, has helped them, and the fund, do well even in bad times.

The fund also what Keith calls emphasizes environmental, societal, and governance integration — making those considerations a part of the process of picking companies and not just a way to rule out companies that score poorly. 

And her results have attracted plenty of attention. At the start of Keith's tenure in October 2008, the fund had $6 million in assets under management, according to Parnassus. At the end of the third quarter, the was $5.9 billion, an increase of rough 98,000%.

Keith says her fund almost always underweights consumer discretionary stocks, one of the strongest areas of growth in recent years, and is also underweight financials. It doesn't invest in energy companies and is currently overweight tech and industrial companies.

She spoke about seven companies included in the fund and explained why she believes in their potential.

(1) Republic Services

Keith has invested in the waste management industry with Waste Management, which eventually outgrew mid-cap status, and then with Republic. She says its services are necessary and, no pun intended, "very sticky."

But the fact that its services are necessary in all kinds of markets wouldn't be enough on its own.

"They are also investing very heavily into technology, both on digitizing their trucks and modernizing those, as well as rolling out a number of software programs such as routing software that allows them to really drive efficiency," she said. "There's very much a steady top line growth story here, but also a margin and expansionary story as they're investing in technology."

(2) Kansas City Southern

Keith says this railroad operator will benefit both from the post-pandemic recovery and longer-term international trade changes wrought by the US-China trade war.

"They've got over 3,300 miles [of railroad track] in 10 States, but they also have an exclusive concession agreement that allows them to operate into Mexico," she said. "There's going to be more activity if you have companies re-shoring or near-shoring into Mexico."

(3) C.H. Robinson Worldwide

The trucking company is one of Keith's major portfolio additions in 2020. She explains that in addition to the economic recovery theme, it's likely to win more business as online shopping continues to increase — and domestic transportation is likely to rally before international transport volumes do.

But in her view, Robinson stands out above other trucking and shipping companies because of its brokerage business model. She describes it this way:

"Being able to match  shippers with businesses that are selling these goods, and match these truckers together. The optimization of that is really what the value that they bring," Keith said.

(4) O'Reilly Automotive

While the auto parts sector is seen as a cyclical one that can rise and fall with the health of the economy, Keith says O'Reilly and its competitors benefit from almost constant demand.

"People go into auto stores, not because they want to, but because it's absolutely necessary," she said. "This is absolutely an essential service."

(5) Cadence Design Systems and (6) Synopsys 

These two software and chip design companies exemplify Keith's approach to the tech field. They've reported strong growth, which is reflected in their stock prices, but she also highlights the long-term reliability they bring to her portfolio.

"Both of these players provide software that is used for semiconductor companies and system companies to design their chips," she said. "Chips are becoming more and more complex. The software is very sticky and these customer relationships have lasted over many, many years. So very wide moat businesses."

She adds that Cadence and Synopsys are only going to benefit as demand for cheaper and better chips increases.

(7) Xylem

Xylem takes another approach to blending the characteristics Keith wants. Their water filters, pumps, and sensors are essential, they should benefit from long-term demand, and their technology gives them an advantage over peers.

"There's a very significant aging water infrastructure systems in the US that are going to need to be upgraded and replaced," she said. "They're in a very strong position with their market-leading products to be able to service these municipalities and other customers in that space."

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