In spite of the odds at the onset of the pandemic in March, I've had plenty of winners -- some of them up triple-digit percentages in 2020. I learned early on in my career that it's often best to buy more shares of a winning investment, rather than selling it for a profit. I plan to do the same with my top five performers this past year: Etsy (ETSY 1.78%), Square (SQ 5.02%), Redfin (RDFN 0.93%), Appian (APPN -0.79%), and The Trade Desk (TTD -0.23%). Here's why.
A little background
First, before I delve into the businesses themselves, you should know that I'm young (I just turned 34), I have no plans to touch my investments for many years (hopefully decades), and I contribute to my accounts on a monthly basis. I thus have a higher penchant for risk taking than many -- meaning I don't get too hung up on short-term performance, even if a stock goes wild either up or down.
All five of my top-performing investments this year would be considered "expensive" by traditional valuation metrics, although they have been that way for some time. After an epic run this past year, perhaps a day of reckoning looms. I'm fine with that. Unless my original reasons for buying disappear (or a stock becomes well over 5% of my portfolio's value), I'll keep buying more on the inevitable dips in share price.
Also, I don't have all my eggs in one basket. I have nearly 70 individual stocks in my portfolio as a result of a small-cap stock shopping spree I went on during the COVID-19 lockdown in the spring. Over time, the losers will get whittled down to refocus on the best of the best. This article is a result of this reevaluation.
Regardless of your personal strategy, though, I believe a focus on companies that are long-term winners is the best route. After a most forgettable year, the stage has been set for years of disruption of the status quo, and I think these five names are poised to continue benefiting.
Digital payments and e-commerce growth is far from spent
With two weeks remaining in 2020, Etsy, Square, and Redfin are up a respective 330%, 270%, and 260% year to date. Not only has e-commerce gone mainstream, thanks in no small part to the efforts of Amazon (AMZN -0.47%), it's starting to reach deep into every sector of the economy. That's why I'm holding onto and looking to buy more of these three stocks.
I view both Etsy and Square as a bet on small businesses and entrepreneurs that have historically struggled to compete against large retailers. But technology to help these small businesses reach an audience online, accept payment from them, and manage delivery has advanced considerably. Everyday retail shopping favors a wide variety of choice, and I think e-commerce and payment platforms like Etsy and Square have a lot to gain as a result. And Etsy is still a relatively small player with a market cap of $24 billion. In a world where retail sales are measured in trillions of dollars every year, Etsy barely shows up as a blip on the map. The same goes for Square and its $105 billion market cap. It's still just a fraction of the size of its peers like PayPal (PYPL 3.69%), Mastercard (MA 0.01%), and Visa (V -0.47%), and has set itself up to disrupt the broader financial services and banking industries as well.
Then there's Redfin, embodying how e-commerce is even starting to disrupt the way big-budget life-changing purchases are made. The online real estate marketplace and tech-forward broker has been booming this year as Americans migrate in the wake of the COVID-19 outbreak. Redfin's results have been especially impressive because homes available for sale have been in such short supply. Still, consumers are turning to the internet to search for new places to live, and I don't see that trend dissipating anytime soon. This bodes well for tiny Redfin, which has a market cap of just $7.8 billion as of this writing.
AI and automation: A new post-pandemic necessity
I've been a patient (and happy) Appian shareholder for years, but 2020 was a game-changer for the low-code software development platform. The company made its first-ever acquisition -- an AI software automation firm -- at the start of the year, and it could be an especially prescient one given how many organizations are behind the curve in making tech updates. In spite of some challenges getting deals signed with new customers, subscriptions to Appian's services increased 31% through the first nine months of the year.
To be fair, the 300% gain in Appian stock is likely due to some investors coming to the realization that this is a legit technologist -- and therefore closing down their bets against it. There's thus no telling if the massive surge in share price will stick. However, despite the jump, Appian is still just shy of an $11 billion market cap company and its business is going strong. If prices reverse course, I'll turn into a greedy buyer of this emerging leader in AI and automation.
Something similar might be taking place with The Trade Desk. Its stock is up some 260% this year, bringing its market cap up to $44 billion even though digital advertisers pumped the brakes in the spring. But it too is a small part of the large and still-growing digital ad industry (estimated to reach $130 billion in the U.S. alone this year). The Trade Desk and its counterpart Magnite (MGNI 0.12%) have massive potential ahead of them as TV, radio, and nearly every other type of marketing imaginable migrates to the internet in the years ahead.
Of course, it should be mentioned that all five of these stocks are "expensive." Appian still operates at a loss, and the other four plow large amounts of cash they generate back into their businesses to promote further growth. This strategy won't sit well with everyone, as it can create volatile share prices tied to each business's growth momentum.
Nevertheless, the world is changing quickly, and the future looks bright for Etsy, Square, Redfin, Appian, and the Trade Desk. It's been an epic year, but I remain optimistic about their prospects for the decade ahead. I thus remain on the lookout to buy more of each of them.