Some investors think we’re at the beginning of a commodity supercycle that will keep prices elevated for a long period. Others are enthusiastic about the prospects of technology stocks, especially now that their prices are lower than they were late last year. If you’re acting on convictions like these, you might want to use a ‘package’ approach to investing to reduce risk if you turn out to be wrong with any one stock selection.
What’s in a package?
Most investors would agree that investing in a diversified portfolio of stocks makes far more sense than buying a single stock and hoping you choose a winner. After all, a well-thought-out portfolio spreads your money — and your risk — among several of our main industry groups. A ‘package’ approach is the way you can use this same principle on smaller segments of your stock portfolio.
Investment packages, after all, are very specialized mini-portfolios you design to take advantage of certain high-risk situations in a specific industry or industries. As with your total portfolio, the investment package spreads your risk over several stocks within a given industry, thereby reducing the impact that a single wrong choice will have on your overall portfolio. Using a package of stocks instead of a single stock for one of the industry groups in your portfolio acts as a hedge against uncertainty, in other words.
The oil and gas and mining industries are good places to use investment packages, for instance — especially when the future of the stocks you choose hinges on exploration ventures. Remember, betting on the success of exploration ventures in both industries exposes you to a range of uncertainties that can effect your investments: Potential difficulties include the success of the find, development problems (flooding, fires, cave-ins, and so on), finding financing, marketing, transportation and others.
Investment packages usually comprise riskier, more volatile issues, such as those we rate ‘Average’, ‘Higher Risk’ or ‘Speculative’. But there are special cases where even high-quality stocks such as those we rate ‘Very Conservative’ or ‘Conservative’ may merit a package approach.
Some investors might well want to use a package approach as a substitute for certain investments in the technology sector after its roller-coaster ride in recent years. The S&P 500 technology subindex more than doubled in value since the low point of March 2020, when the coronavirus first came along, and the end of last year. But now the index is down nearly 25 per cent from the high it reached in November, 2021.
If you believe that faith in the technology industry is still justified, then now may be a good time for an investment package including such stocks as Haivision Systems Inc. (TSX—HAI), a Speculative tech stock that’s a best buy for May, and even one or more of our other Key Stocks like CGI Inc. (TSX—GIB.A; NYSE—GIB), or Open Text Corp. (TSX—OTEX; NASDAQ—OTEX).
Some investors might want to use a package approach as a substitute for certain investments following the contortions the oil and gas industry has gone through in the past few years. Such a package may include a ‘Very Conservative’ integrated oil producer, such as Suncor Energy Inc. (TSX—SU; NYSE—SU), to anchor your package on a firm base. But it could also include riskier, but potentially more lucrative plays in the sector, such as ‘Average’-rated ShawCor Ltd. (TSX—TSX) or a junior producer like Headwater Exploration Inc. (TSX—HWX).
Make it meaningful
One important thing to remember if you do choose to use a package approach in your portfolio is that like any individual stocks in the portfolio, an investment package should have meaningful — though not undue — impact on the total portfolio. Consequently, if you buy an investment package for your portfolio, we feel you should make sure it accounts for at least five per cent, but no more than 25 per cent, of the portfolio’s total value.
Of course, using a package approach differs from investing in just any portfolio that includes risky stocks. True, both tend to incorporate lower-quality stocks. But a package approach targets a specific trend or development that its owner tries to profit from, whereas a more haphazard approach will have no such specific targets.
This is an edited version of an article that was originally published for subscribers in the May 6, 2022 issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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