The Stocks and Shares ISA has been a wonderful invention for people like me. It allows me to grow my investments totally tax-free, and not have to worry about paying capital gains tax every year. Just as importantly, most of the income flowing into my account from dividend stocks also remains exempt from tax.
If I had a spare £5k to invest, I’d split it between out-of-favour stocks where the potential long-term returns could be much higher from today’s prices.
Growth at a more reasonable price
One sector that has been hammered this year is growth stocks, particularly in the US. The valuations of some of these stocks reached ridiculous levels last year. Now though, many have fallen substantially, opening up some interesting opportunities.
Shopify (NYSE:SHOP) is one such company. The share price is down an incredible 81% in 12 months. As a holder, I’m personally feeling the pain, with my Shopify shares down around 60% from when I invested.
Despite the drop, I have no intention of selling my shares because I’m still encouraged by the progress of the company. Shopify sells tools to enable merchants to run their businesses online and offline. The platform has massive scale, with an estimated 3.6m jobs created globally by Shopify merchants. This scale has recently enabled it to sign partnerships with the likes of Facebook, YouTube, and TikTok.
A strange disconnect
Shopify has grown its gross merchandise value and revenues threefold since the start of the pandemic. Yet the share price since then is down around 40%. I think that disconnect between the strength of the company and the weakness in the share price offers me a great opportunity.
There’s an investing adage that says we should only water our flowers, not our weeds. Down 60%, Shopify certainly looks like a giant weed in my portfolio right now. So of course, there’s a risk here that I’m throwing good money after bad, especially with the risk of a global recession looming.
However, I’m inclined to see this as throwing more money into a good company and will be adding to my position this year.
Solid income generator
I’d also be looking for solid income stocks that are down. One that catches my eye is National Grid (LSE:NG), with the shares falling 17% so far this year. The dividend yield is forecast at 5.7%, which I think looks attractive.
This utility giant transmits and distributes electricity and gas, connecting millions of people to the energy needed to live. It’s essential and basically has a monopoly on what it does.
Yet one obvious risk is the potential for energy blackouts this winter. Management has even called this out, saying: “In the context of the terrible things that are going on in Ukraine and the consequences of that [it is] right that we set out what some of the potential risks could be.” These blackout times in the UK would be between 4pm and 7pm, by the way.
Obviously, this wouldn’t be great for a company that connects households to the power grid. Nevertheless, I’d expect blackouts to be temporary and not affect National Grid’s long-term dominance. So I’ll buy this stock if winter passes without blackouts.
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