- Paul Lambert, portfolio manager of the $88.5 million Tocqueville Opportunity fund, returned 45% to investors last year.
- The 34-year-old investor has returned 23% year-to-date and is sifting through opportunities in the technology, healthcare, and industrials sectors.
- He makes the case for five high-conviction, winning stocks in his portfolio.
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Paul Lambert wants investors to embrace the idea of finding opportunities in the midst of a crisis.
Lambert, the sole portfolio manager of the $88.5 million Tocqueville Opportunity fund, has been buying stocks of companies that he believes will continue to benefit from the structural changes caused by the COVID-19 crisis even after the pandemic ends.
The 34-year-old manager, who returned 45% to investors last year, was ranked as one of the best-performing stock fund managers in 2019 by The Wall Street Journal.
This year, with the fund already returning 23% and beating both its category peers and the Russell 2500 Growth index as of September 10, Lambert is looking to extract alpha from companies with "a high barrier to entry, strong competitive advantage, recurring revenue, and a path to aiding in digital transformations."
"While COVID-19 has had a big human toll, it has been a boon for a lot of these companies because of the need to get online and the need to get more digital," said Lambert. "We were already in the middle innings of this digital transformation and COVID-19 has brought forward a lot of demand."
Lambert's top stock picks
One of the stocks commanding the highest demand is Shopify (SHOP), a Canadian e-commerce software company that has been one of the top holdings within Lambert's fund.
"We've been big fans of Shopify for a while and it's ground zero for this digital transformation," he said. "When COVID-19 was happening and people were not allowed to go outside, merchants needed to get an online store right away, and Shopify provides the ability to get your shop up and running in hours or a day."
Lambert believes Shopify could disrupt its larger incumbent Amazon because of the ancillary services it provides, such as inventory management, payment facilitation, and fulfillment, search engine optimization.
"They are at a million merchants today worldwide and the addressable market is well north of $100 million," he said, noting that Shopify is also a good long-term investment because of its partnerships with Walmart and Facebook.
"The partnerships cemented their competitive advantage," said Lambert. "Because those companies have big cash flows to reinvest in the business, and if they thought they could do it themselves, they would, but instead they decided to partner with Shopify to give their merchants direct access to their stores."
Other companies set to challenge their larger incumbents are Paylocity (PCTY) and Paycom Software (PAYC), according to Lambert.
"With COVID-19, the unemployment rate spiked from 3% to 15% overnight," he said. "As we kind of come off this bottom, you have a cyclical tailwind of more people coming back to work and you also have the secular tailwind of more people working from home."
While Automatic Data Processing and Paychex are the giants in the payroll software industry, Paylocity and Paycom benefit from their ability to accommodate small-and-medium-sized businesses, Lambert explained.
"Small-and-medium-sized businesses don't really have like a dedicated HR person, it's usually somebody that wears a lot of hats," he said. "So Paylocity and Paycom bring a cloud-based platform that overlays on your system. It's very intuitive and it can be up and running very quickly, so they've been taking a lot of share from ADP."
Within industrials, which is another heavy-weighted sector in the fund behind technology and healthcare, Lambert likes companies with "hard-to-replicate markets around them." One of his highest conviction stocks in the sector is Waste Connections (WCN).
"They have the garbage distribution, which is very hard to replicate from an environmental point of view," he said. "A big part of their revenues come from residential, and with people staying at home, the waste volume should increase. And they've been having pretty steady pricing power over the year, so we have been adding to it in this correction."
In the healthcare sector, Lambert has looked beyond the chase for a company to develop a one-time vaccine for the COVID-19 pandemic.
"A lot of the market values for these companies such as Moderna are really discounting a success," he said. "What you have to believe going forward is that these vaccine companies will be platform companies where they can take the vaccine and the underlying science and apply it to other areas. That may be correct but that will take multiple years."
Instead, he likes Dexcom (DXDM), which manufactures and sells continuous glucose monitoring systems for diabetes management.
"If you don't control your blood sugar correctly, you can have a lot of knock-on health problems so Dexcom provides the sensors that can monitor and they have to be changed out every two to three months," he said. "So you have this combination of a lot of people getting on the system and a recurring revenue feature."
Tech still has more room to run
Although more than half of the fund's assets are invested in tech stocks, Lambert said he is not worried about the "healthy correction in tech stocks" last week or the record-high valuations of many tech companies.
"Last year people were telling me these are really expensive stocks. I think you have to look at it on a relative basis and make the call," he said. "These companies like Shopify and Paylocity are very innovative, and they're coming up with new products and services that you don't even know about."
"The degree to which these companies continue to innovate will allow them to attract new customers and reinvest in the business," he said. "I think it has this flywheel effect of attracting and being able to develop products faster and bring them to market."
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