: This fund manager’s top 2020 stock picks returned an average 170%. He’s betting on these companies for 2021

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Staying one step ahead of the COVID-19 pandemic, at least where stocks were concerned, paid off for fund manager Gerald Sparrow last year. For 2021, he’s hoping online gambling, education and pets are where the stock magic is at.

Sparrow manages the Sparrow Growth Fund SGNFX, +0.45%, a $97-million midcap fund that was in the top 4% of its category last year, returning 98%, according to Morningstar. The fund, which has seen average annual returns of 37% over five years and 48% over three years, had $31 million under management when MarketWatch spoke to Sparrow in June 2020.

Also read: A strategy of buying ‘the fastest-growing businesses in America’ has paid off for this investor in 2020

At the time, he was advocating for Snap SNAP, +1.14% — parent of messaging app Snapchat — online automobile seller Carvana CVNA, +0.43%, and streaming media player Roku ROKU, -0.93%. Those companies, with respective 2020 gains of around 200%, 160% and 147%, were all pandemic plays that boosted the growth fund’s returns.

Sparrow’s methodology involves monitoring U.S. stocks of all sizes and categories and ranking them based on financial statement changes. “The cash flow, earnings, everything that will measure in the top 10%…is most of the area that we spend our time,” Sparrow told MarketWatch in a recent interview.

His system alerts him to which companies are seeing “significant growth” relative to other stocks, and he then looks to see where the growth is coming from. “So we’re really after organic growth. What are they creating?”

Among the 2021 and beyond trends he’s banking on is online gambling, which brings him to one portfolio addition — DraftKings DKNG, +2.72%, whose shares rose 335% in 2020. The fantasy sports contest and online betting group went public via a merger with a special-purpose acquisition company last April. Shares have gained 27% this year so far.

How much more can investors get out of DraftKings? Sparrow pointed to a recent interview with Chief Executive Jason Robins, who said DraftKings’ mobile sports operations are now in 12 states from just one, shortly after a longstanding U.S. ban on sports betting was overturned more than two years ago. The company has guided for strong growth in 2021, and if its betting operations reach 50 states, that is a lot of growth still to come, he said.

Read: Buy DraftKings and Penn National because digital gambling is in early innings, Goldman says

Sparrow said it isn’t just DraftKings, but other companies like global hospitality and entertainment group MGM MGM, +0.25% that are now getting involved in gambling online, with portals and apps for phones. It is “more profitable just to send an app out to everybody,” he said.

His next stock pick is Chegg CHGG, +3.42%, which provides rentals of digital and physical textbooks, along with online tutoring and other services for students. Sparrow is also a subscriber, reading books to stay fresh on math and probability for investment analysis.

“So when I get a textbook and I read it and can’t get the answers, I put the ISBN number in and they do step by step with flashcards and they have tutors. So I think online education is good and important,” he said, adding that he is frankly “hooked on the darned thing.” Shares of Chegg climbed 138% in 2020 and are up 17% so far this year.

Read: Chegg’s most recent quarterly results

Another stock that Sparrow likes is online payments service Square SQ, +1.48%, whose chief executive officer and chairman Jack Dorsey also heads micromessaging service Twitter TWTR, +4.68%.

“What’s interesting about Square is that they do have point-of-sale hardware and software for making transactions for retail and other merchants, but they’re heavily into the cash app,” which means you can just send cash to someone via their phone, he said. “And that’s a very good trend.”

PayPal PYPL, +2.98%, with its own cash app Venmo, is a Square competitor. Sparrow’s fund has held Square since 2017, but believes the company is starting to branch out, with new services, such as a free stock trading ability added to its Cash App in 2019. Square benefited recently when rival trading app Robinhood restricted some trading in the wake of the frenzy over videogames retailer GameStop GME, +1.88% and users defected to Cash App and elsewhere. Shares of Square jumped 247% in 2020 and are up 21% so far this year.

Sparrow’s last stock pick is Chewy CHWY, +7.01%, which has benefited amid the pandemic as pet adoptions surged and owners spend more time and money on their animals. The online pet-product retailer saw a 45% jump in third-quarter net sales to nearly $2 billion. Chewy shares gained 284% in 2020 and are up 7% so far this year.

“Not only are they getting into more people’s homes for the convenience side, but they’re adding more prescription healthcare-related items to their website,” he said.

Sparrow also weighs on what he sees are some potential blind spots for investors as another pandemic year drags on. “The risk is that we don’t get the pandemic under control with the rollout of the vaccine,” he said, or that stimulus programs don’t get approved.

“So if you get the different strains, and the vaccine becomes ineffective, and we roll back over into the lockout, that’s a big risk,” he said, adding that inflation rearing its ugly head again is another risk.

Sparrow isn’t worried, though, about a stock market SPX, +0.15% that keeps climbing against all manner of headwinds, such as the pandemic. “As populations grow, and economies grow, it’s just natural that companies are worth more over time,” he said.

Read: Small-cap stocks are winning, and here to stay. Why these analysts say it’s bad news for the S&P 500