• Ryan Jacob favors small- and mid-cap stocks for his Jacob Internet Fund.
• He shared with us five stocks he thinks will “well exceed Wall Street estimates.”
• While he tends to stay away from large-cap firms, he shared which two FAANMG stocks he likes most.
• See more stories on Insider’s business page.

When you see the name of Ryan Jacob’s mutual fund — the Jacob Internet Fund (JAMFX) — and the fact that it’s up 201% over the last year, it might be easy to assume he got lucky. 

It’s a simple explanation, your thinking might go — the fund is probably full of the mega-cap tech stocks that investors have piled into during the pandemic, as well as the big growth stocks that were stay-at-home beneficiaries.

But you’d mostly be wrong if you came to this conclusion.

“People assume that, ‘Well, he must own a lot of Peloton, a lot of Zoom, a lot of Tesla. There’s certain names that they kind of associate with the COVID period,” Jacob, the chairman and CIO of Jacob Asset Management, told Insider during a March 18 interview. “They look at our holdings, none of them are there. Netflix, Amazon, where are they? They’re not there.”

Jacob’s investing philosophy leads him to small- and mid-cap stocks, companies that are younger and less developed — an approach that has driven his recent success.

This is thanks in part, he said, to the rising interest rate environment that has persisted over the last half year as investors anticipate an economic recovery and rotate out of large-cap growth stocks and into smaller and more cyclical firms.

With the rise in rates is expected to continue, it should provide further tailwinds for Jacob’s fund. 

That said, Jacob does like two FAANMG stocks despite them having what many characterize as overextended valuations. They are Google (GOOG) and Facebook (FB), because of their focus on future growth relative to the others.

“These are companies that are large, they’re generating lots of cash flow. In some cases — Google, they are buying back a little bit of stock. The multiples, in my opinion, they’re not that demanding. Do I think there will be some multiple compression? Maybe. But here’s the difference. Google and Facebook are going to grow 20-30% a year for a while. They are growing at significantly above market rates,” Jacob said.

He continued: “Apple, or some others… Microsoft, go down the list of some of these other large-cap tech. Less confident.”

But Google and Facebook are modest positions in Jacob’s fund. Again, by and large, Jacob has his eyes on smaller companies.

Given the favorable environment these types of stocks are likely to see going forward, we asked him which ones are among his favorites. He highlighted five that have “very significant” upside potential and that he believes should “well-exceed Wall Street estimates.”

They are listed below in alphabetical order with commentary from Jacob.