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How To Invest Like A “High-Yield” Venture Capitalist

Most regular investors haven’t heard of a guy named Jim Breyer. But Silicon Valley insiders know him as one of the most powerful venture capitalists around.

Back in 2005, his venture capital firm Accel Partners plunked down $12.2 million for a stake in a little-known startup run by a college dropout by the name of Mark Zuckerberg — a name I’m sure you’re familiar with.

By the time May 18, 2012 came around, both men made an absolute mint. That’s the day Facebook (Nasdaq: FB) went public, allowing early financial backers a way to put a dollar value on their stake and eventually cash it out. Breyer was one of the biggest early backers of Facebook, at a time when some thought he was crazy to put that much cash in an untested and little-known social networking website.

But the risky wager paid off with astronomical returns.

By the time Facebook made its debut on the Nasdaq seven years later, it had 800 million users worldwide and was worth approximately $100 billion, making Accel’s 10% ownership stake worth around $10 billion. You sometimes hear about 2-baggers or 3-baggers that double or triple in value. This one was an 830-bagger, turning every $1,000 invested into $830,000.

Facebook’s epic run may not be over. As of this writing, analysts have a consensus price target of $386 on the stock, which implies further growth from current levels. That’s an attainable goal. But even if the stock hits that level, it will never again come close to duplicating its unbelievable performance during the early years.

Sadly, that is the case for many publicly-traded stocks. By the time it hits the market and is available to regular investors, the biggest gains have already been cashed out. Like Facebook, most start-up businesses experience their sharpest growth long before they go public.

History is littered with examples of Silicon Valley investors taking a chance on an unknown business and then hitting it big when the company takes off. And occasionally — when business valuations soar from seven-digit to 11-digit territory — they strike gold.

A recent example is Airbnb (Nasdaq: ABNB), whose website links travelers with homeowners who have a spare house, apartment or bedroom to rent. In 2012, the up-and-coming company already had an estimated value of $2.5 billion. A few years later, it entered into financing talks that implied a valuation of $10 billion. Today, the company has a market cap in excess of $90 billion, more than 30 times what it was worth less than a decade ago.

Needless to say, investors who got on board early were able to cash out life-changing gains.

Of course, this isn’t the only path to riches. Thriving young businesses attract attention and are often scooped up by larger companies looking for an earnings jolt. They are bought out before they can even reach the market.

That was the case with WhatsApp, a mobile messaging service purchased by Facebook for a staggering $19 billion. One of the biggest winners was Sequoia Capital, whose $8 million investment in 2011 blossomed into $3.5 billion. Incidentally, this same venture capital firm was also an early investor in Apple (Nasdaq: AAPL), Yahoo (Nasdaq: YHOO) and Google (Nasdaq: GOOG).

I don’t have to tell you what those three companies have done. The point is venture capitalists aim big. Depending on what stage of businesses development they enter, it’s not uncommon for these guys to take out anywhere from three to 10 times what they put in. Of course, not every investment pans out. Some fail spectacularly. But the big boys win far more than they lose.

How To Invest Like A Venture Capitalist

So how do ordinary investors participate? Well, the truth is many of us simply can’t — not exactly, anyway. Investing in a fund managed by Sequoia Capital or another VC outfit is restricted. Only accredited investors with an annual income above $200,000 or net worth over $1 million are allowed in.

In other words, this was a secret club with closed doors. But obscure legislation passed in 1980 has opened doors to an extent. And while you may not bank 10-bagger gains, you will find what just might be the last hidden bastion of 10%-plus dividend yields.

I’m talking about business development companies (BDCs).

First established in 1980 to grease the flow of capital into small businesses, BDCs are publicly traded entities that invest in privately held companies. There are a couple dozen members of this unusual class, each employing different tactics and assuming varying amounts of risk.

BDCs enjoy some unique perks, one of which is exemption from federal income taxes, provided the company distributes at least 90% of its investment profits to shareholders. In that regard, they are structured much like a real estate investment trust. They also carry some of the highest yields around — in this group, payouts of 8% are considered stingy.

What’s the catch? Well, because these companies don’t retain any profits, they must borrow or issue new shares to raise funding if they want to keep growing. That’s not always easy to do, particularly in uncertain times. But most have rainy day funds and know how to survive unsettled markets.

BDCs typically provide financial assistance to small and medium-sized businesses that are still developing and expanding and don’t always have access to traditional bank lending. The proceeds are normally used for growth projects and other operating needs, although sometimes the cash is needed for leveraged buyouts or other big transactions.

This financing can take many forms, from simple unsecured loans to collateralized senior debt to hybrid convertible bonds. It’s not uncommon for some loan packages to have an equity component that gives the BDC an ownership stake in the borrowing company — and thus an opportunity to profit handsomely.

Closing Thoughts

In that sense, this isn’t too different from what venture capital firms like Sequoia are doing. Of course, BDCs may not necessarily have the next Facebook in their portfolio. But you will find smartly-managed portfolios that throw off some of the best income you’ll find in the market.

And of course, anybody can invest in a BDC, not just accredited investors.

If you find yourself frustrated by the lack of high-yield options in today’s market, I recommend giving BDCs a look. In a yield-starved world, BDCs have proven to be some of the best securities around for income-oriented investors.

In fact, I recently released a report on my three favorite BDCs to readers of my High-Yield Investing premium advisory.

You can go here to learn how to get it now.

7 Hot Post-Pandemic Stocks Set to Soar

Companies rushed to have their employees work from home as governments imposed locked downs. This led to a goldrush in stay-at-home investments, particularly for technology firms. Software companies that enabled virtual meetings and remote working flourished while other sectors floundered.

Now that countries in the developed world have rolled out vaccinations, investors should consider hot post-pandemic stocks that are poised to soar.

The hardest-hit sectors of the pandemic market include tourism and travel. The energy and automotive markets also suffered from lower travel volumes. Looking ahead to the fall, countries with the highest vaccination rates have lower risks of facing hospitalization rates. That makes it a perfect time to buy into post-pandemic stocks, before the market catches on.

Here are 7 hot post-pandemic stocks to consider:

Airbnb (NASDAQ:ABNB) Exxon Mobil (NYSE:XOM) General Motors (NYSE:GM) Las Vegas Sands (NYSE:LVS) Match Group (NASDAQ:MTCH) Norwegian Cruise Line (NYSE:NCLH) Zoom Video Communications (NASDAQ:ZM)

While the risk of coronavirus variants undermining vaccine impact is present, drug companies are ready to respond. Investors should still reposition their portfolios to maximize their potential returns in a world after Covid-19. So let’s take a closer look at some of the best post-pandemic stocks to buy now.

Post-Pandemic Stocks to Buy: Airbnb (ABNB) A close-up shot of the Airbnb (ABNB) app on a smartphone screen.Source: AngieYeoh / Shutterstock.com

Due to travel coming to a standstill last year, Airbnb’s business growth stalled. Yet it still posted revenue tripling to $1.34 billion from the year prior.

Gross booking value of $13 billion smashed past analyst consensus estimates of $11.19 billion. The firm posted bookings of 83.1 million, double from last year, and recovering to the same pre-Covid levels.

New booking trends will emerge now and after the pandemic. For example, ABNB stock will benefit from higher gross nights booked. The company also introduced new product innovations to adjust to the new ways that people travel.

In February, the company launched Flexible Dates; customers have since run 500 million searches using the tool (from slide 4). That strong interaction illustrates how ABNB continues to meet customer demand.

In Q2, active listings grew. Higher non-urban listings in Europe and North America will drive ABNB’s revenue higher.

On Wall Street, analysts have an average price target of $180 (per Tipranks).

Exxon Mobil (XOM) A view of a well-lit Exxon Mobil (XOM) gas station in Pasadena, CA during nighttime. representing exxon mobil stockSource: Michael Gordon / Shutterstock.com

Among the many oil and gas companies to consider, Exxon is a widely held stock for post-pandemic investing.

In the second quarter, Exxon posted earnings per share of $1.10 on earnings of $4.7 billion. XOM certainly didn’t hold back on capital and exploration activities either, spending $3.8 billion in the period.

In the second half of the year, Exxon will ramp up key project activities. This includes Guyana, Brazil, Permian and Chemical projects.

Yet despite $9.7 billion in cash flow from operations, Exxon did not resume its stock buyback. This is a mistake.

Exxon could increase shareholder returns by buying back stock. Still, by reducing its debt instead, the firm will have less exposure to the risks of higher interest rates. Besides, the stock is now trading at a 52-week low. Shareholders also get rewarded by a dividend that yields around 6%.

Higher energy demand as travel resumes will lift Exxon’s revenue. Management will sustain robust returns through new projects. The firm has around $4 billion in potential annual earnings from new projects (per slide 19).

General Motors (GM) Source: Jonathan Weiss / Shutterstock.com

In the automotive sector, General Motors is a strong contender in the electric vehicle market. And as workers return to work physically, demand for gas-powered GM vehicles will also rise.

In the second quarter, GM posted revenue of $34.2 billion, recovering from last year’s depressed $16.8 billion in revenue. It earned $1.90 a share, compared to a 56-cent EPS-diluted loss last year. GM expects full-year EPS in the range of $5.12 to $6.12.

Despite a chip shortage and heavy costs from its electrification plans, GM will produce its high demand vehicles first; strong full-size pickup sales will lift average unit sales.

Consumers eager to spend in the post-pandemic world may order GM’s Hummer EV. Companies may buy GM’s BrightDrop EV 600 commercial EV. And in 2022, GM will have an all-electric Cadillac Lyriq SUV.

Chevrolet’s Bold next year is likewise getting good reviews from critics. Strong EV sales will lead to GM raising next year’s forecasts.

Las Vegas Sands (LVS) a red sign with the Las Vegas Sands logoSource: Andy Borysowski / Shutterstock.com

Casino stocks slumped over the past few months, with Las Vegas Sands leading the decliners. As tourism recovers, people will visit casinos and stay at Las Vegas Sands’s resorts.

In the second quarter, LVS posted net revenue of $1.17 billion, up from $62 million last year. LVS stock fell because the company posted an operating loss of $139 million.

In the period, LVS announced the sale of Las Vegas real property and operations for $6.25 billion. This will help it lower its debt, which stood at $14.42 billion as of June 30, 2021.

LVS is a pure-play on the pandemic recovery in Asia. While North America’s vaccination rates are good, Asia is lagging, with many Asian countries facing rising infection rates. On the conference call, Chief Executive Officer Rob Goldstein said that China adopts a no-tolerance policy on Covid. So if there is an outbreak, it will be widely reported and the country returns to lockdown.

LVS expects the best-case scenario in the region to be steady business activity among China, Hong Kong, and Macao only.

Match Group (MTCH) mobile phone screen displaying match group's (MTCH) logoSource: Shutterstock

The online dating scene thrived as the lockdown intensified. Now that re-openings allow users to meet in person, Match Group will likely continue to grow.

In the second quarter, Match posted second-quarter revenue of $708 million and up by 27.6% YoY. Adjusted EBITDA of $263 million is an increase of 15% compared to the year ago period.

In the third quarter, MTCH stock should get a lift. The company is guiding revenue of up to $805 million, above the consensus estimate of $765.94 million.

Paying subscribers grew in the double digits for all regions. In the Americas, it grew by 16% to 7.9 million. In Europe, subscribers grew by 13% YoY to 4.33 million. In the Asian Pacific region, it grew by 17% to 2.74 million.

In the near term, Match could post revenue growth above 30% as people seek soulmates online. In the next decade, investors may reasonably expect growth of 15% to 20%.

On Wall Street, the average price target is $175 and ranges from $148 to $190 (per Tipranks).

Norwegian Cruise Line (NCLH) Norwegian Pearl, a Norwegian Cruise Line (NCLH) ship, in the middle of the oceanSource: Vytautas Kielaitis/shutterstock.com

Investors might be worried by Norwegian’s losses in the second quarter. What really matters are advanced ticket sales, bookings, and pricing trends.

In the second quarter, the cruise line said that 2022 booking and pricing trends are very positive. It is benefiting from pent-up demand. For the full year 2022 period, NCLH will have bookings ahead of 2019 levels. Advance ticket sales were $1.4 billion.

The return to service plan is the biggest near-term catalyst. This starts with a multi-layered health and safety strategy, detailed on slide 4.

The company committed to a 100% vaccination of all guests and crew. Then, it will relaunch all 28 of the company’s vessels embarking within and outside the U.S. by April 2022.

A widespread sell-off could scare investors away from NCLH stock, given its weak balance sheet. As of June 30, 2021, NCLH had total debt of $12.3 billion. It held cash and cash equivalents worth $2.8 billion.

Zoom Video Communications (ZM) Zoom (ZM) logo on a buildingSource: Michael Vi / Shutterstock.com

Zoom Video is the hottest post-pandemic stock. The video conferencing firm will grow if countries re-impose a lockdown due to the pandemic. Conversely, companies will start with a hybrid return-to-work model. With a staggered rollout of workers at work, corporations still need to attend video conferences.

If the hybrid work environment is here to stay for the next few years, then Zoom’s revenue will steadily grow. Furthermore, Zoom faces no real competition. Cisco’s (NASDAQ:CSCO) WebEx is too restrictive. Even though it is widely used, Microsoft’s (NASDAQ:MSFT) Teams App has an inferior user experience compared to Zoom.

Last month, Zoom agreed to buy Five9 (NASDAQ:FIVN) for $14.7 billion in an all-stack deal. The acquisition will help Zoom strengthen its presence with enterprise clients. It widens its addressable market as Zoom enters the contact center market worth $24 billion. By paying in stock only, Zoom is taking advantage of the recent share price strength.

Zoom and Five9 have a natural fit. Five9 is already a referral partner of choice for Zoom phone. The two firms are also located in the same state of California.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.