One of the consequences of the dominance of the mega-cap growth stocks in the US over the last decade or so is that there is a huge amount of concentration risk. Many funds own the same stocks because they use the same investment process, which is to buy growth stocks, no matter where we are in the economic cycle.
The VT Tyndall North American Fund takes a different approach. It looks first at where we are in the business cycle, and then constructs the portfolio accordingly. There are times when growth as an investment style does not work – 2022, for example – and it is important to avoid periods of major stock market declines in order to bolster long-term returns: the Nasdaq slumped by 33.1% last year.
The fund seeks to differentiate in terms of the stocks we hold as well. We sold our last mega-cap tech stock in late 2020, and since then we have avoided Facebook (now Meta), Amazon, Netflix, Microsoft, Apple, Google (now Alphabet), and Tesla.
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This positioning has been undertaken for fundamental reasons, partly because I think the best days are behind these stocks, but also because history shows us that when a group of stocks comes to dominate a market, their dominance does not last forever. Stocks move in cycles, just like the economy, and an era of outperformance always ends. Think back to the hero stocks of bygone decades: Cisco, IBM, GE, and Intel have been massive underperformers since their time in the sun ended.
Formula One roars ahead in America
In looking for stocks that are not widely owned by other funds and that have great long-term potential, I’ve picked out three stocks. The first is Liberty Media Corp. Series C Liberty Formula One (Nasdaq: FWONK), which owns the Formula 1 franchise. This stock gives investors exposure to one of the fastest-growing sports in the world. The Netflix documentary Formula 1: Drive to Survive has dramatically increased the sport’s popularity in America and made household names of the teams, drivers and owners. There are already two Grands Prix in the United States, Austin and Miami, and this year they are adding a third race in Las Vegas, which promises to be a global spectacle.
MGM Resorts International (NYSE: MGM) is a hotel and casino company. After a tough couple of years post-Covid, it’s now seeing its core market of Las Vegas getting much stronger. Weekend visitation has long since recovered, but the big change now is that the convention business is returning. This helps fill rooms during the week and boost revenue per available room. The F1 race in November will be a major event for MGM with its exposure to The Strip, the four-mile street with the most hotels and casinos, and I expect it to be a significant driver of revenue and earnings in 2023.
Cleaning up the competition
Clean Harbors (NYSE: CLH) specialises in hazardous waste disposal and environmental services. It operates in a highly regulated sector, which to a large degree protects it from new competition. Scale and reputation are prized in this sector, as no client wants to have to do the job twice, and this is where Clean Harbors has a clear advantage as the leader in its field. New environmental regulations are a key long-term theme in this sector as they are catalysts for growth, and this stock is a core holding.
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