Each and every investor needs to make up their own mind about how they diversify their portfolio. However, one lesson I've learnt, is that when headlines are encouraging you to panic, some stocks are easier to hold than others. Ideally, you should have 'high conviction' about every single stock you own. Inevitably, though, you will feel more confident in the investment thesis for certain companies. Time and again, investors lose money when they sell during a sell-off, only to chase up prices later, for fear of missing out on the rebound. High-conviction stocks will help you keep a cool head. Here are three of my high-conviction holdings.
Vocus Communications Limited (ASX: VOC) is my favourite infrastructure company for its growing network of fibre optic cables. The investment thesis for Vocus assumes that companies will continue to pay up for ultra-fast, ultra-secure internet connections. It also assumes that these assets will have value for far longer than most market participants care to consider.
One particularly underrated investment criteria is the involvement of an emotionally invested founder. It's hard to know if a founder is emotionally invested, but I think that Vocus CEO James Spenceley genuinely cares about the prospects of the company. Recent share price weakness puts Vocus at the top of my watchlist, and I'll be sure to buy more shares if the price dips much further.
Another company with a top-notch founding boss is 1300 Smiles Limited (ASX: ONT). It's a company that runs a growing group of dental practices. At $6.60 a share, 1300 Smiles has a lot of growth priced in and it may not deliver that growth in FY 2014. On the other hand, the MD, Dr Daryl Holmes, has proven to be very careful about the acquisitions he makes on behalf of shareholders (of which he is the largest). 1300 Smiles has a competitive edge because it can offer finance to patients. This is truly a blessing for the uninsured, but also assists those whose health insurance is insufficient to cover the procedure required.
Put simply, the thesis for investing in 1300 Smiles is that people will want to go to a dentist that provides competitive rates, a discount for members and can even offer interest free financing for major procedures. Going to the dentist might not be fun, but the wiser amongst us go for preventative care, and we all present ourselves to the dentist once something starts hurting. Furthermore, dentists who want to practice dentistry without the pressure of owning a small business will doubtless continue to be attracted to 1300 Smiles.
You can't have high conviction without trusting management and in that regard, Servcorp Limited (ASX: SRV), passes with flying colours. The company is run by father and son, Alf and Marcus Moufarrige, and it's on the verge of reaping the rewards for expansion plans commenced in 2010. The company is forecast to pay a dividend of 18 cents per share in 2014, putting it on a forward yield of over 4%.
Servcorp leases serviced office space to businesses throughout the world. The company's offices are generally in prime locations and occupancy rates show signs of improving. Were occupancy rates to fall, the company's profits would be hurt. However, long-term shareholders know that not only did the company remain profitable throughout the GFC, but it also continued to pay a dividend. Servcorp's $90 million cash hoard means that it can take advantage of a depressed market, or simply profit from a buoyant one.
Foolish takeaway
As uncertainty rocks emerging markets, I take some comfort in owning a collection of businesses that can weather most, if not all, economic storms. The advantage of having high conviction in your holdings is that you are less likely to panic and sell at just the wrong moment. The first step to having high conviction in a stock is to understand the underlying business.
