Kevin Landis is portfolio manager of the $75 million Firsthand Technology Opportunities Fund (TEFQX). FirsthandFunds.com
Bottom Line: “Dinosaur hunters” and “massive disrupters” are two keys to finding winners.
Some stock fund managers favor fast-growing companies even if their stocks tend to be much more volatile than the overall market. Other managers focus on what they consider to be bargain-priced stocks whose value is generally underappreciated. Wall Street has long debated which of these two is the superior style of stock picking—growth or value.
To help our readers master both styles and use them to pick top stocks in today’s market, Bottom Line Personal interviewed a guru of growth and a master of value, both of whom have outperformed the S&P 500 Index over the 10 years of the bull market.
Below, fund manager Kevin Landis reveals his growth strategies and tech-stock recommendations that can help drive your portfolio for the next decade. (Click here for an article featuring secrets to building a powerful value portfolio with fund manager Bill Miller.)
When I first started out investing in Silicon Valley in the 1990s, I used to scan databases for companies with double- or triple-digit annual percentage increases in revenue. That’s what excites investors and pushes up share prices. But many of those companies couldn’t sustain those growth rates and would come crashing down. Among the reasons: Since many were upstarts, their success attracted much larger, better-known competitors that would create a similar product at a lower cost…management wasn’t experienced enough to deal with so much success so fast…and/or their overall market niche wasn’t expanding fast enough to allow for years of rapid growth. That’s not a profitable formula for long-term returns. So I devised other strategies to uncover stocks that could keep growing rapidly for at least the next decade…
Focus on areas of the stock market undergoing massive disruption based on new technology. Think about the effect of streaming video on the cable-TV business. Disruptive technology alters the way entire multibillion-dollar industries operate and allows small, innovative companies to amass market share quickly. At the same time, the
new technology often triggers a megatrend by expanding the size and potential of the industry itself. Other examples of technology-disrupted industries that offer giant opportunities: Dating websites matching singles…electric vehicles replacing gasoline-powered ones…Internet-based companies taming the soaring costs of higher education…cheap, powerful “cloud-based” software increasing corporate efficiency and profitability.
Stick with midsized to “smaller” large businesses, with market capitalizations ranging from $5 billion to $50 billion. These businesses tend to have matured beyond the “startup” phase, have well-seasoned management and are able to survive an economic slowdown or recession but still are small enough to keep expanding rapidly.
Find “dinosaur hunters.” I like to see fast-growing tech companies that are taking significant market share from much bigger industry leaders.
My favorite now: Workday (WDAY) makes enterprise software that is essential for helping businesses better manage their employees, products, finances and everyday functions such as sales and payroll. This is an industry dominated for the past two decades by Oracle, which is four times as large as Workday. Still, Workday already counts 40% of Fortune 500 companies as clients and expects more than $2.8 billion in sales for 2019, thanks to its superior “cloud-based” business model, which has high profit margins. Companies rent the software on a monthly or annual basis and access it over the Internet.
Look for “bulletproof” businesses. When a fast-growing tech company disrupts an industry, it often draws the attention of large, deep-pocketed outsiders willing to spend a lot to move into the same market niche. If the smaller company can fend off a serious threat, it gives me great confidence in its long-term potential.
My favorite now: Match Group (MTCH) offers 45 online dating brands in 190 countries including websites such as Tinder and Match.com. Last September, the stock plunged about 25% when Facebook announced a dating feature, which has launched in several foreign countries so far. But investors no longer expect Facebook’s service to lure away many of Match Group’s 7.7 million worldwide subscribers. In fact, the stock has since recovered and hit new all-time highs. Facebook Dating will launch for US users later in 2019, but it’s hard to see how it will become a dominant player in online dating when privacy concerns continue to plague the social-media giant.
Seek an enduring competitive advantage—rather than just a hot technology product—that can protect a company’s long-term profits and market share. That advantage might be a unique strategy, a dynamic business model or the ability to offer the lowest-cost product among competitors.
My favorite companies with enduring competitive advantages now…
Cree (CREE). Investors still think of Cree as a high-tech lightbulb manufacturer. But the future of the company lies in its semiconductor chips—vital technology in the radical transformation of the global auto industry. By 2025, electric and hybrid vehicles will account for 30% of all car sales worldwide. Cree’s silicon carbide chips handle heat better than other chips in battery-powered car engines. That allows the cars to get more miles per battery charge, faster charges and overall better performance. Recently, Cree struck a long-term deal to supply chips to The VW Group, the world’s largest automaker, which plans to launch nearly 70 new electric models by 2028, starting with the Audi e-tron and followed by the Porsche Taycan.
Chegg (CHGG) is an under-the-radar powerhouse that uses the Internet to make higher education more affordable and accessible. It’s become known as the “Netflix of textbooks” because it rents hundreds of thousands of textbooks to college students at much lower cost than buying them. Chegg, a combination of the words chicken and egg, also offers a vast selection of free and pay services including online learning tools, tutoring and standardized-test and career preparation, targeting the 20 million students enrolled in colleges and universities.
Roku (ROKU) is the leading streaming video-equipment provider in the US. Its set-top and built-in devices allow you to access online entertainment on your TV set from Amazon, HBO, Netflix, Showtime and others. Because it doesn’t produce content, Roku is far better positioned than competitors such as Amazon Fire. It’s regarded as a necessary and neutral partner by major content providers. Roku’s huge audience—29 million subscribers who are expected to stream about 30 billion hours of video this year—also gives it pricing power in negotiating fees from advertisers and revenue-share agreements with content providers. Even though the stock tripled in the first six months of 2019, Roku still has a market cap of about $12 billion and its valuations will continue to rise as more streaming services that use the device launch.