Kim Bolton's Top Picks
Kim Bolton, president and portfolio manager of Black Swan Dexteritas
FOCUS: Technology stocks
Global stock markets have taken a pounding in the first half of 2022! It’s now hitting new lows due to Federal Reserve Chairman Jerome Powell’s decision to raise interest rates more aggressively and it’s now leaving stocks with sobering year-to-date losses ranging from 18 per cent for the Dow Jones to 23 per cent for the S&P 500 and 31 per cent for the tech-heavy Nasdaq.
Thankfully, your Black Swan Dexteritas [BSD] portfolio management team has successfully defended both the BSD Global Tech Hedge Fund and our separately managed accounts by offsetting the long stock portfolios with our short equity index positions (aka the ‘hedge’). The stock portfolio’s unrealized losses are offset by gains on the hedge. When stock markets entered oversold conditions, we lowered the hedge and let the stock portfolio appreciate during the bear market rallies. As of the third week of June, the BSD Hedge Fund is only down 8 per cent year-to-date and the separately managed accounts have single-digit gains year-to-date – our active management strategy and tactics are built for both bull and bear markets with elevated volatility.
The stock market forecast for the next six months holds glimmers of hope. While global economies are showing signs of weakness and the geopolitical picture is gloomy, stocks have a significant probability of staging a stunning fightback. Historically, since World War II, every time we had a calendar year gain of 20 per cent or more (like in 2021), the market then fell double digits in the first half of the following year and in the second half of that year the markets returned to at least break-even by the end of the year.
Your BSD team believes inflation’s impact on the stock market and this year’s interest rate increases have already been significantly priced in by investors. By the winter/spring of 2023, the developed world economies could experience a relief rally if investors start to convince themselves that the Fed may need to dial back its aggressiveness so as to prevent a deep recession. Remember, stock markets tend to look 6-12 months ahead (in terms of valuation), which means it acts as a forward indicator. So, today’s markets reflect the economic environment for the spring of 2023, which should be significantly more optimistic than today. The markets will need major participation from its largest sector – the technology sector – when this rebound starts to unfold.
We remain confident our portfolio management tools can generate annualized returns in excess of 8 per cent for the BSD Fund and achieve the performance expectations of our customized separately managed account clients.
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
- Listen to the Market Call podcast on iHeart, or wherever you get your podcasts
- Apple has a long runway to PT due to its wide economic moat, the company's high profitability, its high innovativeness and expected rate of return.
- WWDC 2022: Keynote takeaways:
- Apple Pay in four options introduced.
- M2 enabled MacBook Air and 13" MacBook Pros launched.
- New M2 chip.
- OS updates announced.
- CarPlay enhancements are interesting.
- Apple’s highest margins come from their services segment (67 per cent in the most recent quarter)
- Services include Apple Pay, app purchases, news and music
- Apple faces the greatest challenge compared to other peers in the new regulatory pushback against big tech. Apple could soon face regulations forcing it to allow other payment options on its App Store which has been the core business for its services segment.
- In the new world reality where generations remain completely obsessed with social media, Meta remains the undisputed king of social media. The company has reached 3.64 billion monthly active users across its platforms and has generated 2.87 billion family daily active people. That is a level of consumer penetration that is unprecedented. With an estimated world population of close to 8 billion people, where three billion people still do not have access to the internet and almost a billion lack access to clean water, achieving 45 per cent penetration is a tremendous achievement.
- The sheer magnitude of the shareholder value destruction that has taken place at Meta since the beginning of the year is both tragic and historic at the same time. The social media giant had more than $430 billion shaved off its market cap and is currently trading at a 51 per cent discount on February prices. With Meta Platform’s stock now below $170/share, the company is trading at x7 EV/EBITDA and a 2023 forward PEG of below 1x.
- In its Q1’22 earnings report & forward commentary), Meta management took the opportunity to lay out a better (than feared) short-term revenue growth guide, and how new product innovations (which are driving investments in FY2022) will position Meta for the long-term while balancing a lower OPEX guidance to align revenue trajectory with margin dynamics given the volatile landscape with continued shareholder returns.
- While debates will persist over product transitions and industry platform headwinds in the quarters and years ahead, we remain focused on Meta’s large-scaled audience across a family of apps that the company can continue to align on evolving consumption habits in short-form video, messaging, commerce, augmented reality and social connections.
- While the transition of advertising revenues against broader privacy changes remains volatile and difficult to predict, we see platform/infrastructure investments by Meta (which began in the Summer of FY2020) as continuing to build independence from a volatile range of outcomes from future mobile OS platform changes.
- Meta reported Q1 total revenues of $27.91bn (vs. Street $28.28bn), or +7 per cent YoY, including Family of Apps revenues of $27.21bn (+6 per cent YoY) and Reality Labs revenues of $695mm (+30 per cent YoY).
- Within Family of Apps, Meta reported total advertising revenues of $27.0bn (+6 per cent YoY), including by region as follows: US & Canada $12.0bn (+1 per cent YoY); Europe $6.36bn (+0 per cent YoY), Asia $5.66bn (+20 per cent YoY) & Rest of World $2.95bn (+21 per cent YoY).
- Q1 total DAUs were 1,960mm (vs. Street 1,952mm), including 196mm in US & Canada; 307mm in Europe; 827mm in Asia & 629mm in Rest of World.
- Q1 GAAP operating income was $8.52bn (vs. Street $8.55bn) for a 31 per cent consolidated GAAP operating income margin.
- By segment, Q1 GAAP operating income was as follows: Family of Apps $11.48bn (41 per cent margin) & Reality Labs $(2.96)bn.
- GAAP EPS for Q1 was $2.72, compared to Street $2.56.
- Accenture is an IT consulting and outsourcing powerhouse with client companies across just about every sector imaginable. With the ongoing transition to the cloud, management has been focusing on cloud integration with partnerships with Microsoft, Oracle, Amazon, Alibaba, Google and many others.
- The company’s client base includes more than 75 per cent of the Fortune Global 500, and 97 of the top 100 clients have been partnered with it for over 10 years. The technical side of Accenture’s business is obviously important; however, the real strength is built on their client relationships and being the go-to solutions provider.
- One reason for Accenture’s solid performance even during recessions might be the wide economic moat Accenture has, which is preventing customers from leaving Accenture even in challenging times. The switching costs that arise are based on a bond of trust that is formed as well as learning costs.
- ACN currently yields 1.3 per cent.
- Accenture will report earnings tomorrow (June 23) with analysts forecasting revenue of $16.05B and EPS of $2.85 will be disclosed. We expect guidance from Accenture could be stronger than anticipated. The firm expects revenue growth at the upper end of the +22 per cent to +26 per cent constant-currency guidance range. While recession scenarios are front and center with investors, we believe ACN's model would be resilient in a modest recession scenario. Much of ACN's work is noted to involve mission-critical digital transformation service offerings like cloud and security services, which in many cases will likely be treated as largely non-discretionary by enterprises. While ACN management commented during the FQ2 earnings call that quarterly bookings may be lumpy, we anticipate a healthy book-to-bill of ~1.1X in FQ3.
PAST PICKS: August 4, 2021
ServiceNow (NOW NYSE)
- Then: $593.47
- Now: $450.68
- Return: -24%
- Total Return: -24%
Upstart Holdings (UPST NASD)
- Then: $127.98
- Now: $38.20
- Return: -70%
- Total Return: -70%
Fiverr International (FVRR NYSE)
- Then: $230.58
- Now: $33.60
- Return: -85%
- Total Return: -85%
Total Return Average: -60%