Where are tomorrow’s winners?

If it’s in the news, it’s in the price.

If journalists and investors are celebrating a stock now, there is a good chance that optimism is in the price. And if that is the case, there is a good chance that the company will under-perform in the future.

But there are some companies that severely test these rules of thumb.

Nvidia (NASDAQ: NVDA), for example.

The chip maker has enjoyed a near year-long celebration around its exposure to AI spending. The news is in the price, but the news just keeps getting better.

You can see this from the recent surge in quarterly earnings growth:

Source: Finchat

In April 2023, quarterly EPS was US$0.83. In April 24, it was US$6.04. Data centre revenue accounted for a massive near 90% of total revenue in the last quarter.

The question is, what is a sustainable rate of growth for Nvidia? The surge of the last 12 months is clearly not sustainable. What happens after the initial AI cap ex boom? And how much longer does this boom run for?

These are questions I can't answer. I have no expertise in the sector and no interest in competing with people much smarter than me to work it out.

My simple rule of thumb is that when you have half the investing planet focused on a company and its earnings, there is little chance of making money from it…apart from speculating that the share price will continue to go up.

With the world fixated on AI, big tech, semiconductors, and ‘quality compounders’, I’m constantly looking for unpopular and hidden opportunities.

Sometimes they’re easy to spot, but they’re never easy to invest in.

What today's winners looked like in 2021

To give you an idea of what tomorrow’s winners look like today, let me tell you about two companies that I bought and recommended to members back in early 2021.

This was when ‘buy now pay later’ stocks were all the rage. People couldn’t get enough of renewable energy because windmills and solar panels were going to displace traditional energy and power the planet.

That meant traditional energy stocks were in the toilet as far as sentiment was concerned. They were cheap, and you looked like a clown if you owned them.

This is why it’s hard to buy out-of-favour companies. No one wants to look like a clown.

The key to unearthing good contrarian investments is to find a lie that the market believes is true. The market believed in green energy, and that traditional energy had no future.

This was clearly not true. But emotionally, it felt right. People wanted to believe it. As a result, traditional energy stocks were unwanted and cheap.

I remember a conversation I had with an acquaintance in April 2021. He was telling me about his investment in Zip. We didn’t know it at the time, but it had already peaked. Still, it had huge year-on-year growth, and for the rear-view mirror driver, it looked like it would continue. 

Clearly, you didn’t look like a clown if you owned Zip or any of the buy-now-pay-later stocks back then. Little did most investors know that by buying now, they would indeed pay very dearly later on. Zip was around $9 at the time. It is now around $2.20.

My acquaintance asked what I liked. I mumbled something about Origin Energy (ASX: ORG) being good value. You know, the one with the dirty big coal plant and the LNG export terminal selling soon-to-be obsolete goods?

There was zero interest in this suggestion. I clearly had no idea what I was talking about.

I remember the conversation because I felt uncomfortable. But it’s exactly the thing you look for in an out-of-favour investment. I had only just recommended the stock, and you don’t necessarily want people agreeing with you in the early stages.

One other thing going for Origin that no one seemed to realise at the time was its $500 million investment in a 20% stake in Octopus Energy. I was so excited by this I titled my report:

1 May 2020: The Major Company Announcement That No One Noticed

On the day that Origin revealed this investment, the market sank 5%. COVID was causing all sorts of uncertainty. A year later, I reasoned that hardly anyone would’ve noticed the announcement.

I wrote:

It [Origin] made a company-changing announcement on that day. 11 months later, and the stock price is actually LOWER than it was back then!

This has given us a potentially spectacular opportunity in a large-cap stock.

In my view, this is a game changer for Origin and puts it well ahead of its Aussie energy retailing competitors.

Three years later, Origin has increased its stake in Octopus Energy to 23%, which is now worth around $3.15 billion (based on the latest equity raising by the private company). That’s nearly 20% of Origin’s market capitalisation.

In the years to come, Octopus could end up being worth more than Origin’s traditional business. Ironically, Origin is slowly becoming more new energy and less old energy. That will especially be the case if or when it spins off its LNG business.

Brookfield very nearly got the company for a steal.

Back in 2021, I had no idea how this would turn out. But by buying companies when they are ugly and unwanted, things often can’t get much worse. When that is the case, they generally turn out better than expected.

One other quick example…

A couple of months beforehand I had recommended Whitehaven Coal (ASX: WHC). This stock was really in the toilet. I don’t think I was game enough to mention it to anyone.

Around the same time, Peter Fitzsimons asked if I was Matt Canavan’s brother (I’m not) on Twitter, in response to a pretty rational comment I made about our energy supply.

So I thought it best to keep my head down on this one.

Which was just as well, because a few months after I recommended it, the company ran into geological problems at Narrabri. The stock price tanked. I actually did feel like a clown. I was close to dumping it.

Again, this is the point. Tomorrow’s winners make you feel very uneasy owning them today. They’re not the stocks you feel comfortable talking about.

As investors, we constantly look for affirmation and encouragement that we are doing the right thing. We feel good investing with the herd, but that is the last place you want to be, especially at the start of the investment.

It's fine when the herd catches up to you, and you might find it profitable to run with it for years after. But seeking its company and warmth from the outset is a dangerous investment strategy.

Which brings me to my question for you. Where are tomorrow’s winners hiding now? What is the story the market believes that is not true?

I still think traditional energy is undervalued. But it’s not the same bet as it was a few years ago.

I’ve got a bunch of new ugly ducklings in the portfolio, and a bunch that I’m monitoring. Of course, I have too much dignity to reveal their names here.

But give it a few years…

Feel free to drop your ideas in the comments below.

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