Stocks That Need Love
As an advisor, or any investor, you should be looking at stocks that the crowd may have forgotten.
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It was before the peak of the dot-com bubble and I saw a job posting on the CFA website. It was for a stock analyst position for a successful mutual fund company that had a great track record. As part of the application process, they wanted a write up about stocks that I liked for investment.
To my dismay, the manager sent me a decline letter saying that my picks were "telling" because I was not considering valuation. He was right. Many of my stock picks were high quality, yet they soon plummeted. The problem was clear: everyone loved them.
That's when I learned to always have some money in stocks that need love and maybe a good hug!
I like to own investments that many people aren’t talking about or considering. Often, these are underappreciated niche players with great reward/risk potential. Clients like to own them, too!
I'm looking further down the market cap spectrum to discover gems—investments that have reasonable pricing and promising upside. Recently, I've directed more capital toward these kinds of investments, particularly when I know the company well. I'm also holding a more cash or shorter-term securities to take advantages of mispricing if volatility increases and valuations come to more reasonable levels.
Deviate from the Norm
Many advisors avoid deviating from benchmark weights to concentrate in lesser-known securities, but allocating a portion of capital to managers who have a solid active process can reap rewards for you and clients. For advisors without a research background or time for in-depth analysis, selecting managers is your best way to go. But for advisors with a background in investment selection, this can be a big differentiation for you to attract new clients.
Independent Research and Proprietary Models
For research-minded, successful and experienced investment advisors, consider building your own models for clients. This approach has served clients well over the years and helps build your assets under management. This is not the standard advice given to wealth managers and rightfully so. Only take this approach if you are truly dedicated and in love with the nitty-gritty of security selection and position sizing, and if you have the discipline and resources to follow-through with your strategies through the ups-and-downs in the markets.
Recently Added Positions
Recently, I’ve been adding positions in companies like Jackson National JXN, Lincoln National Corp LNC, SiriusXM Holdings Inc SIRI, Spotify Technology SPOT and DocuSign Inc DOCU within both my proprietary and client accounts. The idea is to invest in securities that may not be as widely adored by investors yet have a strong business foundation and are trading at attractive valuations. These kind of holdings are not exactly at the top of the headlines, but could reap reasonable returns.
Streaming Music Leader
Take Spotify, for instance. As a market leader in streaming music, it operates in over 180 countries, serving more than 600 million monthly active users, including nearly 250 million paying subscribers. With room to raise prices and low market penetration in many areas, it has considerable growth potential.
Spotify also has operating leverage potential: while it pays a relatively fixed price for its music, its gross margins are stable, and as the subscriber base grows, margin expansion becomes possible.
Spotify spends money on marketing and R&D in a disciplined way. They built a strong presence and competitive advantage globally. Spotify now generates significant revenue for labels in a post-album-sale market. This network effect, is solid as users are highly engaged and take advantage of social sharing with features like playlists. Spotify’s position, is making it more challenging for competitors to lure users away.
Profit from the Growth in Retirees
Some lesser-known insurance companies are doing well capturing growth from the massive number of people entering retirement. Jackson National Life is an insurance company is winning business and is lesser known. It is priced more attractively. They are conservatively financed and provide stable retirement income solutions.
As the number of people retiring balloons, they continue to capture new assets under management and fee revenue. Jackson's new distribution strategy to access the independent RIA market is gaining traction and is better aligned with future growth in the industry. This company is also trading at a reasonable valuation. Similarly, Lincoln National represents another strategic addition in this space.
Recurring Revenue from Digital Agreements
Another stock I fit into this category is DocuSign. As a market leader in e-signatures and contract lifecycle management, DocuSign enjoys a strong position in digital agreements. In today’s digital world, it shows substantial revenue growth, with recent revenue reaching $736 million, exceeding high-end guidance and reflecting strong financial health.
Their recent launch of the Intelligent Agreement Management (IAM) platform has shown promise, delivering larger deals, improved win rates, and faster closures. DocuSign’s international expansion is another positive, with a 17% year-over-year increase, signaling global growth potential.
With stable customer growth and predictable revenue supported by a 99% net dollar retention, DocuSign remains attractive. The company has also identified a $50 billion addressable market across e-signatures and lifecycle management, although it faces competition. Given the stock’s currently undervalued state, I’ve allocated a small position here as well.
Bitcoin, Gold, and Silver
I've also been investing in gold, Bitcoin, and silver. Having a collection of securities that are eclectic—rather than benchmark-focused but still publicly traded—is an excellent way to enhance returns for investors.
Strategic Position Sizing for Success
One advantage of holding individual securities rather than funds is that you can let your winners run and pare back on underperformers, reallocating capital as companies demonstrate their value over time.
Position sizing is critical—I apply a reward-to-risk approach, assessing worst-case scenarios and sizing positions so that potential downside has a limited impact on my overall portfolio, while the upside is significant enough to make a difference within an active portfolio.
For those who manage active portfolios, I find this equity strategy rewarding. If you prefer to delegate or lack the research inclination, consider finding managers who employ these strategies. Let me know your thoughts on these stocks and any other ideas you have within the often-overlooked, underappreciated world of investing. Follow for more!
