Goldman Sachs Fund Rides On Quality

The last time IBD profiled Goldman Sachs Growth Opportunities on June 12, it was way ahead of its peers, thanks to its exposure to high-quality growth stocks. Little has changed.

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The managers' bread and butter are high-quality stocks selling at attractive prices. What are high-quality companies? They're industry leaders with recurring revenue, high return on invested capital, sustainable free cash flow and pricing power.

Such traits translate into high long-term growth rates, which fuel meaningful price advances.

Getting in at attractive valuations gives the fund room to benefit from a stock's multiple expansion during its run-up, the managers say.

The fund's top holding as of Sept. 30 was Equinix, which provides network services. Q3 earnings rose 213%, which was 57% higher than estimates by analysts, who see a 30% rise in Q4 and 23% growth in 2010.

Fundamental Picture

Fundamental weak spots appear to be a high debt and low return on equity. The company had leveraged up on capital to expand its data centers. A bright spot is that after-tax margin is the highest it's been in four years.

The stock has broken out of several basing and consolidation patterns since mid-June. Its price has risen 47% since then. It sits near a new high, 8% beyond its latest basing area.