Kevin Landis' high-growth tech fund has doubled investors' money this year. He told us 3 ways he put together a winning portfolio of 'head-scratchers' — including an unusual bet on electric cars.
- Kevin Landis' Firsthand Technology Opportunities Fund doubled its benchmark and investors' money in 2020.
- He told Business Insider how he finds stocks in new and rapidly developing markets that help him deliver outstanding growth.
- He also explained why his main method of electric-vehicle investment is in LED-lighting maker Cree, not Tesla.
- Visit Business Insider's homepage for more stories.
The thing that set many of 2020's top investors apart isn't a secret. It's just Tesla.
For example, most of the best fund managers of this year counted the electric-car giant as their largest or second-largest holding. There's no shame in being on the right side of one of the most-debated stocks of modern times when the argument is settled.
But it does mean that managers who brought in big returns without going long on Elon Musk's company can claim a little extra credit for creativity, or just for diversification. Kevin Landis and the Firsthand Technology Opportunity Fund belong to that group.
Landis, also the chief investment officer for Firsthand Capital Management, doubled investors' money in 2020 with a 100.7% return as of December 21. That's more than twice the gain of its benchmark, the Morningstar US Technology Index.
Why Landis buys obscure companies
Landis took a small position in Tesla in March while looking for quality names during the sell-off, and held onto it briefly. But he mostly stays away from mega-cap stocks in favor of companies with more potential growth. That means he's not afraid to fill his portfolio with less-familiar names.
"I like to remind people that the time to invest in Netflix was when you'd never heard of Netflix," he said in an exclusive interview. "If we're making really great investments, our portfolio should look like it's got a lot of head-scratchers in there, because they're companies that people have never heard of."
To that end he says that many of the best ways to invest in the electric-car industry are in the private market. And in the Opportunity Fund, he gets that exposure not with Tesla, but with Cree, which makes power electronics that multiple electric-vehicle companies need.
"EVs going beyond just buying a Tesla is perhaps finally here," he said. "You have to use this material called silicon carbide to really get your power electronics just right. And Cree has been the leader in silicon carbide for decades."
He added Cree to the fund in 2018, and it's appreciated by about 115% over the last year. In fact, Landis' top four stocks have each than doubled in value over the past 12 months, which helps explain his fund's performance in 2020.
Here are some of the pillars of the approach he's followed.
(1) Needs, not numbers
Landis explains that he wants to get into new markets that are expanding quickly. He points to the examples of online education company Chegg, his second-largest position, as a stock that's taken off because it's filled a newly vital need during the pandemic, or Netflix, which benefited from customer dissatisfaction with cable companies and Blockbuster.
"When we're looking for technology trends, we're looking for cases where people have solved, or are helping to address, some previously unmet need or some growing need," he said.
If they're in an early stage, financial metrics won't fully capture their potential, but he argues that an investor doesn't have to know everything about a company or a market before getting involved.
"When I worked in high-tech market research, I used to say 'the market for toothpaste is really well modeled and fully understood, and it's really dull,'" he said. "The most exciting markets don't have good numbers around them."
(2) Don't get too defensive
Recessions and downturns are usually seen as bad times for growth stocks, but Landis says those periods actually reveal the best opportunities and the ones that are just coasting.
"There are a lot of companies … growing along with the rest of the economy, or they're slowly gaining those last few points of market share," he said. "In normal times, those can look like growth stories and those can be sold to you as growth stories, but they're really not, and you see that when there's a recession."
Slumps can also be helpful in changing investors' priorities. Because the pandemic wiped out most peoples' expectations for 2020 and even 2021, it's inadvertently turned more people into long-term investors.
"It's actually forcing investors who want to be long-term investors to actually be long-term investors," he said. "It forces us to really, really look down the road at what companies can become."
(3) Forget what you knew
"If you do pre-COVID analysis on any of your companies right now, I don't want to say you're wasting your time, but it's of limited use because we've really reset the way we look at a lot of things," Landis said.
One of those things is the growth potential of moderate-to-large companies. The fund's biggest investment is in Roku, which has surged 159% in the last year in part because streaming became even more popular during the pandemic.
At one time, its new valuation of about $43 billion might have made its potential look relatively limited. But already-large companies have done very well in 2020, so Landis says its gains and new size don't limit the stock's potential.
"There's a lot of headroom for what you might have at one point called the mid-cap growth," he said. "I try not to be too constrained by how the valuations were framed a year ago, because a year ago so much was different."
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