Kim Bolton's Top Picks: July 15, 2020

Kim Bolton, president and portfolio manager of Black Swan Dexteritas
Focus: Technology stocks

MARKET OUTLOOK

The narrative supporting the strong stock market rally is all about potential vaccine development, reopening regional economies and short coverings. There is an evident disconnect between the real economy and the stock market, but we must respect the market enough so as to not fight the tape.

We have positioned the BSD Global Tech Hedge Fund with the expectation of more volatility. The fund is 85 per cent invested across a couple dozen tech vendors and tech end-users, with a 70 per cent short equity index hedge that will incrementally grow if the market deteriorates. Our fund will be protected from drawdowns, but if global stock markets continue to defy the “actual economy” and climb higher, we will marginally participate in those gains. At the time of this analysis, we're still up over 25 per cent year-to-date, versus 1 per cent for the S&P 500 and 1.8 per cent for the 50/50 Nasdaq/Russell benchmark.

Prior to the pandemic, a paradigm shift towards digitalization and servitization of the economy was already underway. Current events have accelerated the paradigm, as evidenced by the marked shift in spending towards digital businesses. In a contactless world, the vast majority of interactions with customers and employees must take place virtually. With rare exception, operating digitally is the only way to stay in business through mandated shutdowns and restricted activity. The fund is fortunately invested across many of those vendors supplying these digitalization products and services, plus some of those end-user companies that have embraced this digital transformation. The stock market rally of the last three months reversed much of the March oversold condition, but many of those technology vendors have become detached from their underlying fundamentals and those of the broader market. At this juncture, one of two things can happen to make the technology vendors/broader market ratio less overbought:

1. Stocks other than the tech vendors can rise faster than the tech vendors; or,
2. Technology vendors can fall.

Given how much technology vendors have meant to the broader market indices, investors should pray for the former. The BSD credo of prosperously navigating unexpected events with great skill and agility defines our ability to outperform in these uncertain markets.

TOP PICKS

Dropbox (DBX NASD)

Elastic NV (ESTC NYSE)

Lemonade (LMND NYSE)

Past Picks: July 22, 2019

Alphabet Inc. (GOOGL NASD)

• Then: $1139.21
• Now: $1528.34
• Return: 34%
• Total Return: 34%

Infineon Technologies (IFNNY OTC)

• Then: $19.22
• Now: $25.55
• Return: 33%
• Total Return: 35%

Palo Alto Networks (PANW NYSE)

• Then: $221.59
• Now: $244.10
• Return: 10%
• Total Return: 10%

Total Return Average: 26%