In September, 2012, The Globe and Mail launched a project called Strategy Lab where four investors would each manage a model portfolio with an initial value of $50,000. Five years later, when we closed down the project, my model portfolio was worth more than $250,000.
The most successful stocks in my growth portfolio were Netflix Inc., Google (Alphabet Inc. since 2015), Apple Inc., Tesla Inc., Facebook Inc. and Booking Holdings Inc. (formerly Priceline.com). Rounding out my portfolio was Redknee Solutions Inc. (now Optiva) and Sierra Wireless.
Most of these stocks have continued to perform spectacularly well since the closing of the project in September, 2017, but it is Tesla that seems to really stand out. Tesla stock opened this year at US$440, and rallied up to nearly US$1,000 last week.
The stock closed Monday at US$771.28, up US$23.21 or 3.1 per cent.
When Tesla rises by more than US$100 two days in a row, as happened last week, it garners major media attention. Strategy Lab may be over, but I still own the stock personally. Shouldn’t I be selling? Isn’t this price action unjustified?
Not so fast. I’m not selling my shares. I think Tesla is in the strongest position it’s ever been in and it’s trying very hard to disrupt several industries. Over the next 10 years, I think Tesla stock can expand tenfold.
But let’s go back to the volatility for a moment. Let’s back up and pretend Strategy Lab was still operating today. Since the last update in September, 2017, Tesla stock has more than doubled. But so has Amazon’s, and Netflix is close to a double. Even a non-technology holding in the portfolio, Starbucks Corp., is up almost 70 per cent. Tesla has been the star performer, but not in a way that seems outlandish compared with other great stocks in that time period.
I first turned bullish on Tesla in 2013, when they expected to make only 20,000 cars for the year. They’ll likely exceed 500,000 cars this year. That’s a 25-times increase in car sales, while the stock, since 2013, is up around seven times.
It’s already obvious to me that the entire automotive industry will transition to battery electric power. Tesla is by far the dominant leader here. Their competition, in 2020, can’t yet match the performance of a 2012 Tesla Model S electric car. Tesla has a multiyear lead in technology.
I believe Tesla also has a massive lead when it comes to battery cost. We’re on the cusp of Tesla being able to build a battery powered car for less than the equivalent internal combustion engine vehicle.
Tesla also appears to be far ahead of most competitors with research and development on autonomous driving. Tesla sells related upgrades, such as enhanced autopilot and acceleration boost, as add-on software that any Tesla owner can buy via the phone app, and it’s essentially pure profit margin. Comparing Tesla with Ford Motor Co. or General Motors Co. seems to be like comparing Amazon with Barnes & Noble Inc.
Tesla is also pushing hard to grow its energy production and storage business. It’s doing incredible work with solar glass tiles for residential markets and massive battery storage systems for the electrical grid. These are all fast-growing markets.
My investment strategy is to buy the leaders in important, emerging industries where there is major disruption and innovation. Doing this requires you to recognize opportunity and generally have an optimistic mindset. Pessimists don’t seem to do well here because every great opportunity seems like a mistake.
By following this philosophy, my investments in Apple, Alphabet, Netflix, Booking Holdings, Tesla and Facebook have all grown to several times their initial purchase prices. But there have also been a lot of very wild rides both up and down, just as we saw with Tesla last week.
My advice for anyone attracted to this style of investing is to become unemotional and don’t look at stock prices most days. I didn’t even know Tesla had roared higher by more than US$100 in a day until I got an e-mail from someone asking me about it. I was busy living my life. My plan is to buy great stocks, and then hold and prosper. I’ll sell when my reason for buying is no longer true.
If I had to t all over and launch Strategy Lab again today, I’d still include all of the stocks mentioned in this article. With the obvious exception of Starbucks, these are all technology companies that hold leadership positions in important industries affected by shifting advertising spending, cloud computing, artificial intelligence, entertainment and a transition to sustainable energy.
And if I was allowed, I’d likely add two more names to my portfolio: Nvidia Corp. and PayPal Holdings Inc. These are two names that I don’t personally own yet, but probably will this year.
Nvidia is a leader in graphics processing, which is really important for not just video games and coming virtual reality, but also for processing video to be used in training neural networks for self-driving technology. This is a very computing-heavy field and it should grow over the next decade.
PayPal is the company that I still see as the preferred method of payment for a lot of online transactions. With more and more e-commerce happening every year people want the convenience of paying using a credit card, but without having to actually go grab their wallet. PayPal is a trusted place for consumers to store payment information, requiring only a password to pay. I think there is a lot of growth left in this space.
Chris Umiastowski was the growth investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.
Chris Umiastowski