First there was the $600 ballcap. Navy blue and logo-free, its appearance on a popular cable drama came to epitomize the concept of “stealth wealth.” That is, the idea of a wardrobe investment so moneyed, you have to know to know.
But that was also a bit of a lark. “stealth wealth” (and here we tip our Italian cashmere brims as well to its partner, “quiet luxury”) rose to TikTok fame in 2023 as a trenderrific way to signal success by, well, avoiding trends altogether. For a time on social media, the art of subtlety reigned. Fashion watchers extolled the virtues of celebrities sporting well-worn investment pieces that never bow to trend or go out of style.
Then the concept seemed to go out of favour.
While social media masses have moved on — to loud budgeting or whatever else comes next — many investors have been quietly packing their portfolios with well-researched buy-and-hold favourites for years. Strong fundamentals just might be a look that never goes out of style.
We spoke to well-known small and mid-cap investor, Peter Hodson, founder and head of research at 5i Research, about what he looks for in a great portfolio investment piece. It won’t surprise you that he’s more concerned with a stock’s fundamental value than what the masses are saying about it.
Here are four investing maxims that he considers when looking for a stealth wealth investment:
Beware the perils of chasing trends
“By definition, if there’s a trend it means valuations have changed. Otherwise nobody would be talking about it,” Hodson says. “So the question is, has something changed from a fundamental point of view or from a speculative point of view?”
Just as in fashion, a rising trend can signal a new perspective or emerging value, but it can be wise to do your research. Hodson notes some themes that have caught investor attention over the years — from lithium and electric vehicles to meme stocks. In each case he notes there were companies that went on a skyrocket ride even if they lacked strong fundamentals. Key metrics such as revenue, cash flow and return on assets can help to tell you if the company is making money.
“People often think that if they get in on a trend, they can’t lose, but it’s actually the opposite — they can lose nearly all of their investment if they buy the wrong stock.”
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If I look at my winners they’re things that I’ve held for 7, 8, 10 years.
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Understand how your investment is built
Just as it can be important to know how a well-tailored jacket is built, it’s vitally important to Hodson that he understand how a company makes money before he invests in it.
“A lot of investors forget that they’re going to be owners of this company and they have a right to some of the profits, so they should know where those profits are coming from,” says Hodson.
In this case, it’s possible to find much of what you’re looking for right in the company’s annual filings, which are readily available through SEDAR or in the Markets & Research section of your online broker. A company’s annual report can tell you not only what’s happened in the past year of the company, but also what its goals are for the year ahead. Among the things Hodson looks at on a balance sheet: net earnings, cash flow, revenue growth and profit margins.
“I like to compare what they plan to do versus what they were actually able to do. Gives you a feel as to whether they can actually execute on their business plan,” he says.
Take care when equating price with value
Momentum can be a powerful signal. “When a stock has momentum from a price point of view and from a fundamental point of view, it can be a very powerful movement, one of the greatest in the market,” says Hodson.
That said, it’s not uncommon for stock prices to move in the opposite direction from what the fundamentals are telling you — perhaps even over a prolonged period of time.
“I like to look at what the fundamentals are doing first, then look at the price trend just to see if anybody cares,” says Hodson, adding that an understanding of those company metrics could save you stress during periods of volatility.
“Because we know that markets don’t go straight up,” says Hodson, “so if you’re watching the fundamentals and you can see they are improving, it can help you sleep a little better at night.” You may be able to ignore day-to-day movement, though it’s harder to ignore the overall trend.
Boring can be beautiful
“I will take boring over exciting all day long,” says Hodson. Some of his favourite investments are companies that go about their business totally ignoring what’s happening out in the investment world, rarely issuing new stock or flashy news releases.
How do you find them? That’s where Hodson uses stock screens.
“I might screen for midsized companies that have been around for a period of time, and add in companies that have low debt, that don’t issue stock or the stock count hasn’t changed much over 10 years.”
There are more than 9,000 public companies listed on North American stock markets, says Hodson, but you might realistically only track 20 or 30 of them. Other things investors can screen for: Companies with high return on equity, annual revenue growth over 5%, dividend yield and more. By limiting the information you consider, you can shrink the size of the pool and could uncover an investment that’s been quietly making gains for years.
“You don’t need many big winners to have good portfolio,” he says.
Don’t sell your winners and hold your losers
“As far as common mistakes go, this in the top three,” says Hodson, referring to the old adage that investors tend to sell their winners first. “It’s really just simple math: You’re never going to get a stock going up 10,000% if you sell it at 500%.”
One question you can ask yourself whenever you’re considering a sale: What’s changed that someone else is willing to pay more for this stock?
If the answer is nothing, it’s just bigger and more profitable, then “that to me could be the closest thing to free money because nothing’s changed except an investor’s propensity to pay more for that company,” says Hodson.
You might still consider selling, he says, particularly if it’s a portfolio management issue (e.g. ensuring your overall portfolio is not becoming too concentrated in one investment or sector). But you’ll have done so with eyes wide open.
At the end of the day, good fundamentals can drive the core of a strong portfolio, just as they can a timeless wardrobe.
“If I look at all my winners they’re things that I’ve held for seven, eight, 10 years,” says Hodson. “I think investors need to get back to fact it’s a business they own, not a stock.”
