Jim Callinan returned 83% to investors last year. Here are the 5 growth trends and 5 corresponding stocks the investing chief is watching in 2021 to position his portfolio for more explosive growth.

  • Jim Callinan manages the $217.6 million Osterweis Emerging Opportunity Fund, which returned 83.24% and beat 97% of its category peers in 2020, according to Morningstar data.
  • Callinan's investment philosophy hinges on how sales growth drives margin expansion and then margin expansion and earnings growth drive stock prices.
  • In an interview, he breaks down the five key secular growth trends and five corresponding stocks he's watching in 2021 to position his fund for even more explosive growth in the year ahead. 
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Jim Callinan has always been enthralled by the growth of small companies. 

Working as a consultant for Arthur Andersen in New York in the early 80s, he witnessed exactly that and wanted to capture the prolific opportunities in the space. 

"The excitement of seeing some of the small companies grow that fast … I really wanted to get into investing," he said in an interview.

Today, Callinan, with over three decades of small-cap investing experience under his belt, is at the helm of the $217.6 million Osterweis Emerging Opportunity fund. 

The fund, which aims to identify small companies with significant revenue and earnings growth potential, returned 83.24% and beat 97% of its category peers last year, according to Morningstar data.

"I believe, first and foremost, that sales growth really drives margin expansion," he said, "and then margin expansion and earnings growth drive stock prices."

Since Callinan started managing money in 1984, betting on companies with rising earnings power and revenue growth has allowed him to generate handsome returns, but he found that hyper-focusing on "unknown, mysterious or misunderstood companies" in emerging industries and market niche could magnify those returns. 

"Whether the market has sold a company off because they had a bad quarter but the market doesn't really understand the company or the markets are really worried about some macro events," he said. "For example, when Square went public, people were so afraid of the losses in the credit card business, and it knocked Square down from $20 to $8, things like that give you opportunities."

He continued: "Or maybe the outlook is so great and so unbelievably good that the market underestimates the future potential once it gets to a certain valuation level, they're not willing to look out into the future because they feel that valuation level is too high for them to continue on. That's another opportunity that we find really interesting."

To position his portfolio for further growth in 2021, Callinan has taken into consideration both the coronavirus-induced changes in 2020 and the shifts expected from the economic recovery and reopening this year. 

He shared the 5 secular growth trends he's focusing his investments on and the 5 stock picks anchored to each of the trends. 

(1) Remote work technology

As the world waits to be vaccinated, Callinan believes that the pandemic could last a lot longer than expected given the ever-increasing infection rates and the new strain of COVID-19 being discovered. Additionally, he sees a substantial part of the global workforce shifting to remote work permanently. 

As a result, work-from-home stocks are expected to continue charging their growth forward. 

Five9 (FIVN), which has risen 43% in the past year, is one of the stocks that Callinan believes can continue to benefit from the trend. 

"This is a call center company that basically is also a SaaS company," he said. "They charge a monthly subscription so companies can flex it up and down. Their call center workers can have a much higher call volume by working from home instead of going to an oppressive call center."

He added: "Then they can add more artificial intelligence and more revenue per agent. There's a lot of playing field there considering that a lot of companies didn't do service after eight hours."

(2) On-demand dining 

The food delivery business has benefited from the pandemic as much as the restaurant industry has been devastated by it. 

Similar to the remote-work technology trend, on-demand dining is subject to headwinds from the economic recovery and the eventual return to normal, but Callinan believes that the convenience of getting food from your favorite restaurants at home is here to stay. 

He points to portfolio holding Wingstop (WING) as a direct beneficiary because its specialty food is designed to be easily packaged and delivered. 

"It's really meant to be a takeout restaurant," he said. "They benefitted immediately in March and April of last year. They got their act together and had had an exclusive arrangement with DoorDash."

He added: "I think that can go to multiples of the present size of the company, from 1500-ish restaurants globally now to 2300-ish restaurants by 2025."

(3) Short-term vacation rentals 

Aside from the restaurant industry, the travel and tourism industry is another hard-hit sector by the pandemic. 

But Callinan argues that consumers will prefer private short-term vacation rentals for their privacy to hotels with a lot of communal space. 

Because of that shift, companies such as Airbnb (ABNB) are likely to benefit. 

"I think the great thing about Airbnb is it's really going to allow a lot more liquidity into the timeshare business," he said, "The owners can rent out their properties, whether they have one or two properties one or two weeks a year. They can rent that out now and they can find more liquidity through a short-term rental business like Airbnb."

He added: "I think that's a really powerful dynamic. The fastest-growing customer segment in the timeshare industry is the rentals by Airbnb."

To be sure, Callinan does not own Airbnb stock in his portfolio as it is a large-cap stock. 

(4) Precision oncology 

While many investors are focused on vaccine-related healthcare stocks, Callinan believes that precision oncology is a secular growth trend that promises more exciting opportunities. 

Precision oncology refers to another approach to treating cancer that ensures each treatment is specifically designed and targeted to a patient's specific form of cancer.

In addition to the medical innovation aspect of it, biotech companies operating in the space also tend to have many sources of revenue and growth.

"They can license their intellectual property, they could do a royalty deal with a bigger drug company, they can sell out to a bigger drug company and the bigger drug companies are more willing indeed to replace their pipelines that are being depleted," he said. "So there's a lot of exciting things going on in that area and there's a lot of new companies that have become public in the last two years."

Callinan's top pick from the trend is Turning Point Therapeutics (TPTX), which rose 105% in the past year.

(5) Renewable Energy 

Since the Biden administration unveiled its climate change agenda, renewable energy stocks have been riding on a lot of momentum and tailwinds, but Callinan thinks the industry is still at its early stages. 

His top holding in the space is Enphase (ENPH).

"When you put up a solar panel network on your house and the solar panel went out, the whole thing went out and so you couldn't draw any power from that solar panel," he said. "Enphase developed what they called an inverter, which allowed energy generated from the solar panels to bypass the downed panel. That was a huge efficiency increase for the industry."

"They have a very tightly integrated system with their panels and they've been using that to gain share in California, Florida, and Texas, so the big populous states that have a lot of sunshine," he added. "They're doing super well and gaining tons of share against their number one competitor SolarEdge.

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