Fund Seeks Stocks' Inflection Points

The two co-manage the $254 million American Century New Opportunities (NASDAQ: - ) and its $449 million sibling, New Opportunities II (NASDAQ: - ). The managers look for inflection points.

That's when a business starts taking advantage of an outside event and hits a period of accelerating growth in earnings.

The funds essentially are the same, with a high degree of holdings overlapping. But the original is sold directly by American Century and New Opportunities II is sold through financial advisers.

New Opportunities was up 15.78% for the year going into Thursday vs. 6.37% for small-cap growth funds tracked by Morningstar and 5.21% for the S&P 500. For the past 10 years, the fund has produced an average annual return of 8.41% vs. 7.22% for its peers and 5.99%.

The managers have a two-pronged approach to finding new names for the 106-stock portfolio. First is screening stocks with high relative strength. That usually narrows the choices to about 30 names. Then they look at what external factors will make the business grow.

The managers don't seek or avoid any specific sectors. But Southwick says they will favor certain themes. If a given sector is outperforming, it is more likely that a new investment idea will come from there.

"We like to fish in the pond with the largest fish," Southwick said. "If, for example, industrials improve over financials, we'll move to industrials and out of financials."

The focus is domestic, although foreign stocks made up about 5% of fund assets on June 30.

WellCare Health Plans (NYSE: - ) was picked up in June 2006 at about 50. The firm provides managed care through government programs.

New Contacts

Last year the movement to outsource those services gained steam, and WellCare won several new city and state contracts.

With plenty of government bodies looking for help in managing Medicare and Medicaid costs, Southwick sees WellCare's annual earnings growth accelerating.

The stock, now trading near 100, has an IBD Composite Rating of 96. WellCare Q2 earnings beat estimates by 5.7%. The stock is testing its 10-week moving average line after its July 13 breakout from a base above 94.35.

Another top holding as of the latest holding period is Priceline.com (NasdaqGS: - ). It allows consumers to make bids for airline tickets, hotel rooms and other vacation services.

The big change: Priceline is bringing European hotels onto the site. In the U.S., the majority of hotel rooms are owned by chains. That limits the ability of Priceline bidders to get good deals.

In Europe, the opposite is true. Without the pricing power of a major chain, it's easier to find a hotel willing to accept a bid.

Europe also has a much lower penetration of online hotel booking, leaving more room for Priceline.com to gain market share.

The fund bought the stock in July 2006 at 30. It's now at about 77, with a Composite Rating of 99, the highest possible. It gapped higher Wednesday after the company reported Q2 earnings growth of 102%, which extended its string of triple-digit growth to three quarters. It also beat analyst estimates by 25%.

The fund managers have no specific price targets for selling or allocating assets. Positions start at 1% of the fund and don't get added to. Any positions above 1% are solely due to increases in the stock price.

One stock the fund recently sold is Syntax-Brillian (NasdaqGM: - ). It was at about 2% of assets.

When the fund bought the maker of liquid crystal screens for TVs in mid-September, it was trading at about 4.5. The trigger to buy was a decline in the price of flat-screen TVs and a favorable review in Consumer Reports.

That set off a growth spurt for the company, and the stock in January hit a closing high of 11.

The fund held on. But soon Syntax ran out of working capital and the debt market dried up for tech companies. That was the signal to sell the position, at about 6.