Stocks like Apple, Adobe, and Visa have proved to be great investments. Investments like these have a number of common features. One is that they have dominant positions in the industries they operate in. Another is that they have desirable economic characteristics. Taken together, these features have allowed Apple, Adobe, and Visa to generate huge returns for shareholders.
The problem with stocks like these, though, is that pretty much everybody knows about them. This means shares in these companies are nearly never cheap. Even in times of stress, market participants are drawn to these stocks as relative safe havens. As a result, I think the best stocks to buy for my portfolio now are ones that have similar features to Apple, Adobe, and Visa, but that are less well-known than those big names.
I’ve found a stock to buy right now that I think fits the bill. The company is modernising an industry still reliant on technology that—in some cases—dates back to the 1950s. It has a dominant position within its industry, winning more business annually than all of its major competitors combined. And in its 20 years of operating, the company has never lost a customer to a competitor.
Best of all, I think the company is currently flying under the radar of most investors. Its market cap is just over $7bn, which means it’s too small to make a meaningful difference to the portfolio of someone like Warren Buffett. But it’s plenty big enough for an investor like me. Any guesses as to what it is?
The company
The stock I’ve been buying is Guidewire Software (NYSE:GWRE). The company provides operating software to the insurance industry. If you’ve ever heard of Salesforce, think of that but with a much more specialised focus. Guidewire concentrates on being the best within its niche and, as far as I can see, it’s leaving its competitors in the dust.Â
I think that Guidewire’s size protects it reasonably well from disruption. Since it produces more revenue than its next five competitors combined, it has the scale to fend off smaller competition. But for a bigger player like Salesforce, the opportunity in the insurance sector is unlikely to be big enough to justify the resources needed to compete with Guidewire.
At the moment, Guidewire is unprofitable. Unprofitable companies, such as Guidewire, have been hit hard by the market lately. At the time of writing, Guidewire stock is down around 33% from its highs. As interest rates rise to combat soaring inflation, there’s a risk that Guidewire stock might underperform for a few years.
Over time, however, I think that Guidewire’s business should win out for me as an investor. The company is in an excellent financial position, with current assets more than covering total liabilities. And I expect it to expand into the substantial untapped opportunity within its industry. Guidewire looka like one of the best stocks for me to buy now for my portfolio, while growth stocks are out of fashion. And if they stay out of fashion for an extended period of time, I intend to keep buying.