Although many investors are turning more cautious as the bull market ages, others have decided it’s worth taking some risks to boost their returns. In the June 1 issue, Bottom Line Personal offered five winning strategies for cautious investors. This time, we are offering bolder choices from six top investment experts for investors able to stretch their comfort zones…
Sangamo Therapeutics (SGMO). This small California biotechnology firm develops gene-therapy treatments, the latest way to fight disease. Its scientists remove damaged cells from a sick patient. They alter the genes in the cells, often causing them to start or stop producing certain proteins, then inject the altered cells back into the body.
Why it’s risky: Gene therapy can invoke dangerous responses from the body’s immune system. Sangamo does not yet have an FDA-approved offering on the market.
Why it’s worth it: Sangamo is conducting six midstage gene-therapy clinical trials targeting conditions such as hemophilia B and HIV that affect millions of people. The therapies are meant to be treatments that actually cure these diseases, as opposed to current treatments, which require a regular regimen of drugs for life to hold them off.
John McCamant is editor of Medical Technology Stock Letter, Berkeley, California. BioInvest.com
ShotSpotter (SSTI) provides patented acoustic surveillance technology that detects outdoor gunfire in violence-prone neighborhoods. It is able to automatically alert police in about 100 cities and on 10 college campuses. Revenues are expected to rise 30% in 2019 to $46 million.
Why it’s risky: The small company depends on contracts with two US cities—New York and Chicago—for more than one-third of its annual revenue. Also, police departments typically are slow adopters of breakthrough technology, and ShotSpotter systems are expensive, about $65,000 to $90,000 per square mile annually.
Why it’s worth it:ShotSpotter has no direct competitor in gunshot-detection services. Recently, it signed a three-year contract with the government of the Bahamas and has opportunities to expand into Latin America. Also, ShotSpotter is likely to benefit from the rollout of much faster 5G wireless technology, partnering with Verizon to integrate sensors with new Internet-connected devices deployed on city streetlights.
Christopher Van Horn is an equity analyst specializing in the aerospace and defense sectors at B. Riley FBR, a Los Angeles–based investment bank. BRileyFBR.com
Copa Holdings (CPA) is Latin America’s leading airline, headquartered in Panama City. It flies to 80 cities in 32 countries mostly in Central and South America and the Caribbean.
Why it’s risky: Political instability in Latin America is widespread and can have a major effect on ticket prices and the number of travelers Copa attracts each year.
Why it’s worth it: Copa, with consistently high on-time arrival rates, is one of the most efficient flight operators in the entire airline industry. Copa’s new partnership with United Airlines offers additional nonstop routes and reduced travel times between US and Latin American cities.
Zai Lab Ltd. (ZLAB) is one of the new generation of small biopharmaceutical companies in Shanghai that licenses Western medicines not yet approved in China, takes them through the regulatory approval process and eventually commercializes them. In addition, it distributes its own drugs.
Why it’s risky: Much like in the US, developing a new drug in China includes clinical and regulatory risks, although in China the process is up to 50% less expensive.
Why it’s worth it: Zai Lab partners with major Western pharmaceutical firms such as GlaxoSmithKline and Bristol-Myers Squibb to market its drugs to Chinese consumers. Chinese health care is a robust market that’s unlikely to be diminished by either a slowdown in Chinese domestic economic growth or a rise in US-China trade war tensions.
Michael Kass is manager of the Baron International Growth Fund (BIGFX), New York City. Over the past 10 years, his fund ranks in the top 11% of its category, returning an annualized 10%.* BaronFunds.com
US Stock Funds
Akre Focus (AKREX) invests in about 20 fast-growing large companies, most focused on financial services and telecommunications.
Why it’s risky: It has a very concentrated portfolio and very little exposure to popular technology stocks such as FAANG stocks (Facebook, Amazon, Apple, Netflix and Google parent Alphabet Inc.).
Why it’s worth it: Manager Charles Akre bets on undervalued companies that generate enormous cash flow and dominate their industries, including cell-tower providers and insurance firms. The fund, launched in August 2009, has a five-year annualized performance of 15%, which ranks in the top 14% of its category. AkreFund.com
Eventide Gilead (ETGLX) invests in fast-growing US companies of any size but keeps about 80% of its assets in small- and mid-cap stocks.
Why it’s risky: In addition to focusing on often volatile small- and mid-caps, it has a daring strategy. It follows Christian principles, “To honor God and serve its clients by investing in companies that create compelling value for the global common good.” Many of these businesses, which include cloud-based software, biotech and private, pre-IPO companies, have potential for explosive growth but also high failure rates and may not be consistently profitable.
Why it’s worth it: Fund manager Finny Kuruvilla, who has an MD and a PhD from Harvard, has exceptional talent for picking young companies that will be successful. In the past 10 years, the fund has ranked in the top 3% of its category with a 17.5% annualized return. EventideFunds.com
Janet Brown is president of FundX Investment Group, San Francisco, which publishes the NoLoad FundX newsletter. FundX.com
Foreign Stock Funds
Grandeur Peak International Opportunities (GPIOX). The Salt Lake City–based small-cap stock fund invests in 200 companies, mostly in developed markets such as Europe and Japan.
Why it’s risky: The fund focuses on very small businesses. About 20% of its assets are in microcaps (market capitalizations from $50 million to $300 million), which can be highly volatile.
Why it’s worth it: Small stocks of companies based in foreign developed nations may have begun a multiyear rebound after years of poor performance, and their valuations are much cheaper than their US counterparts. The fund, launched in 2011, had 5.4% annualized returns over the past five years, compared with 1% for the MSCI ACWI ex US Index. The managers previously had a successful track record in foreign small-cap investing at Wasatch Advisors in Salt Lake City.GrandeurPeakGlobal.com
David Snowball is publisher of MutualFundObserver.com, a fund-analysis website that tracks 36,000 investment products.
Better Than Junk Bonds for Income-Oriented Risk Takers
Fixed-income investors willing to take some risks should consider the following….
The Alerian MLP ETF (AMLP), an exchange-traded fund (ETF) of more than 20 master limited partnerships (MLPs). MLPs are companies that typically own oil and natural gas pipelines, which generate steady cash flow. They avoid corporate taxes by distributing almost all of their income to shareholders, which can generate very attractive dividend yields.
Why it’s risky: Many MLPs have disappointed fixed-income investors in recent years. The companies loaded up on debt when interest rates were low, then found themselves badly overleveraged when rates started to rise, which hurt their share prices and forced them to slash their payouts.
Why it’s worth it: This ETF recently had a hefty 8.1% yield, and most of the MLPs it holds have reduced their heavy debt and boast strong balance sheets. These companies are likely to keep raising their dividends because the demand for pipeline and storage capacity is growing. The fund, which returned just 2.2% annualized over the past three years, has risen 18.2% this year versus 15.8% for the S&P 500.
Charles Sizemore, CFA, chief investment officer of Sizemore Capital Management, an investment-advisory firm, Dallas, and coauthor of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy. SizemoreCapital.com
*All performance figures are from Morningstar Inc. and are through May 10, 2019