Forbes’ 2015 Investment Guide featured Tony Mitchell as the “Unknown All-Star Money Manager." With just one week left in 2016, Tony, who is up over 23% for the year, is showing once again that great investors are worth all the effort it takes to find them. Here’s what Tony Mitchell is recommending to his friends and family this holiday season.
Tony started his Internet fund at Marketocracy in October, 2000. His returns have averaged 16.76% since then, which compares nicely to the S&P 500’s 4.93% return over the same period. Before taking anyone’s investment advice, you should always check out their track record. Here is Tony’s.
Tony Mitchell: There is one overarching strategy that I stick with and tweak as necessary which is buying companies that I believe can return 25 – 100% ROI over the next 1-4 years without taking on extreme risks and hold them as long as I believe that they still fit my criteria.
Kam: That sounds pretty simple, but how do you determine which companies fit those criteria?
Mitchell: There is a multitude of factors that I test each company against before scoring its potential and I’ve listed some of these below, but one of the simplest yet most important is determining if it is like a good house in a bad neighborhood or a fixer upper in a good neighborhood. I don’t like good companies that are in declining industries, but I do like companies that are beaten up, but fixable, in a growing industry. This is a big part of the reason my Internet Fund has done so well over the long term – I’m focused on companies in or using internet technologies to grow their business. I believe that we are still on the forefront of utilizing the power of the internet technologies.
Some of those other factors include; The Macro Economy, Governmental Changes, The Balance Sheet, Free Cash Flow, The Pipeline of Products or Services, Competitive Activities, The Press that the Company is receiving in general and in the Investment Communities, and the Trends related to all of the above mentioned factors.
Kam: Can you give me an example of one company that worked well in 2016 and why?
Mitchell: Let me tell you about two – the first is Sprint (S). Sprint was trading as low as $2.18 early in 2016 and as high as $8.98 in December of 2016, Year to date, Sprint is up 140%. Although Sprint had many challenges in fighting the larger carriers for market share, we all have known for a few years that everything is shifting to mobile from desktop and with the backing of Softbank (SFTBY), I had the conviction that the rising tide would lift this ship and if they did a few things right, this could be a great holding for a longer period, and it has done well in 2016.
The second is Advanced Micro Devices (AMD), another company that had gone through some tough times, and their price was beaten down with other chip makers as everyone worried about the slowdown in the PC market, but all internet related technologies are using some type of chips and I liked the changes being made at AMD with new leadership and I believed that they would get it right and have a large upside potential with limited further downside risk. AMD is up over 300% this year.
Kam: What stock or strategy are you recommending to your friends and family for next year?
Mitchell: It really depends on what their investment needs are. I think most people fall into one of three groups, and although some stocks may work for all three, the allocation would be much different. An example would be FaceBook (FB). We’ve talked about FB many times and it is still the largest holding in the Internet Fund, and I still like it for long term growth. In August, I said that I believed FB would close above $130 in 2016 which it did, and could reach $150 in 2017. I still believe that and think it is a good buy now that it has pulled back under $120, which will provide a 25% plus return when it reaches $150 in 2017.
Here are the three groups that I believe most investors fit into and how much FB that I would allocate in a portfolio for each:
Group #1 is the investor that is investing for the long term and looking to grow their portfolio through investments that can outperform the market, can tolerate a little more risk and isn’t looking for immediate income. This group is what the Internet Fund is modeled for and an allocation of 7-14% in FB could work for this group.
Group #2 is the investor that is nearing retirement but is concerned that they don’t have enough to retire on so they are looking for growth, but are more concerned with risk also because they can’t afford to lose anything. I’m working on a new model portfolio for this group that is a bit more diversified and while FB could work in this model also, I would keep an allocation of no more than 3 – 6% in FB.
Group #3 is the investor that is at or in retirement that is seeking income, but may need a small amount of growth to sustain their funds throughout their life and they are very concerned with risk because they don’t want to go back to work. FB could work for this group also, but I would keep it to an allocation of under 3%.
Kam: Are there others that you are recommending to your friends and family for next year?
Mitchell: I’ll give you one that is back on my buy list and that is Herbalife (HLF). HLF worked through its issues with the Department of Justice in 2016, and Carl Icahn has been buying more since the settlement. I still run into people on the street that use the products and swear by them. I also see the nutrition industry as a good neighborhood to buy in, so I believe that there are tailwinds behind HLF and the stock is trading at a reasonable PE of 17, and is trading closer to its 52 week lows than its high of $72.22. I think it can be bought today below $50 and will see a 25 – 35% return in 2017.
My Take: There are lots of technology funds, ETFs, and Index funds that focus on internet stocks. But none that focus on companies that are using technology to improve the economics of an industry. Tony has executed this investment strategy more successfully than anyone.
Over the last 10 years, Tony’s Internet fund did better than the top U.S. Equity fund manager and would rank in the top quartile for the last 5 and 3 year periods.
To explore whether Tony’s portfolio makes sense for you, click here to schedule a One-on-One with Ken Kam.
Disclosure: I am the portfolio manager for a mutual fund advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.