By: Jeff Pollock
February 1
, 2018

Anyone with investments knows that some days you’re the windshield, other days you’re the bug.

Stocks that performed well yesterday won’t necessarily be the best investments for tomorrow, and the dogs of an index one year have the potential to outperform the market the next.

Following its parabolic gains in 2017, Bitcoin now sits at $9,100, down around 53% from where it traded just two months ago. Similarly, after sharp gains last year for the weed stocks, the group is now off roughly 20% in the past couple of weeks (the largest, Canopy Growth, is down 35% from its high reached on January 10).

This doesn’t mean that stocks sitting on comfortable gains are destined to fall, but our Investment Committee generally turns its attention to contrarian ideas where the company (and consequently its stock) is out of favour by the market for the time being. Over time, our view is usually that the business will work out its problems and a stock price recovery will follow.

Two stocks we added to client portfolios last year in the Technology sector fit into that category.

  • In July, Waterloo-based Open Text Corporation showed up on our screener as a Technology stock that failed to participate in the sector’s rally. Though the market was hung up on a considerable acquisition made a few months prior and its future impact on the company’s margins, our team focused on the 84% of its recurring, contracted revenue that was guaranteed each year mostly from its cloud computing business. Yesterday it posted exceptional earnings and investors sent the stock price up almost 13% today.
  • Last November, Electronic Arts had dropped 11% because of a mere quarterly outlook less bullish than analyst expectations. We ignored the outlook and focused on the company’s lack of debt, double-digit earnings growth forecasted for the next several years, and adoption of higher margin digital games. Two days ago, it reported earnings and the stock has rallied 8% since the release.

We’re finding more of these ideas as we look for tomorrow’s opportunities. With a longer-term horizon that stretches beyond a single quarter, our analysis of a business is logical and rooted in numbers rather than mere instinct. Obviously, we won’t chase securities that performed well in the past if the business lacks the fundamentals to justify such share price appreciation. Instead, we continue to employ a contrarian style and look for stocks out of favour today but due to our patience will benefit client portfolios longer-term.

 

 

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