Kim Bolton, president and portfolio manager at Black Swan Dexteritas

FOCUS: Technology stocks 

MARKET OUTLOOK:

Investors can’t seem to make up their minds as to where stocks should go from here. There is uncertainty regarding how the bank crisis will play out and whether the Federal Open Market Committee’s next move will be a rate hike, a rate pause, or a rate cut. Think about it, how often is it that credible arguments can be made for any of those three decisions?

With that uncertainty, is it any surprise that the S&P 500 is sandwiched right between its 50 and 200-day moving averages? In the near term, the next major stock market moving catalyst will come from the 2023 first-quarter earnings season. Total S&P 500 earnings for the first quarter of 2023 are expected to be down 9.4 per cent from the same period last year on 1.8 per cent higher revenues. This would follow the 5.4 per cent decline in the preceding period’s earnings (fourth quarter 2022) on 5.8 per cent higher revenues.

Market participants will also focus on individual business forecasts so as to revise future estimates. Your BSD team believes there is a significant probability that an imminent U.S. Federal Reserve monetary policy pause is on the horizon, which will be supported by steadily lower inflation. We expect stock markets to continue to rally another five per cent to seven per cent from current levels for the next three to six months, led by cyclical growth stocks (especially the technology vendors).

We view this bullish call as just a strong rally within a sideways, range-bound secular bear market. Tightening financial conditions by third quarter 2023, will lower the S&P 500 price-to-earnings ratio and result in an earnings per share (EPS) recession later this year. The expected length of time for this EPS recession and the impact on the stock market is very difficult to predict.

While the market searches for the next fundamental catalyst or technical signal, your BSD portfolio management team will continue to trim those securities that are achieving their respective intrinsic values and buy those stocks that exhibit longer, more lucrative investment runways. The hedging overlay will always be an important tool to protect your capital in bearish markets and also an important tool to be “dialled down” in bullish.

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TOP PICKS:

Equinix (EQIX NASD)

There are five reasons to be bullish on data centre REITs, and especially Equinix. Firstly, it has relentless growth of cloud (25 per cent+ CAGR). Secondly, it has secular growth still in early innings. Thirdly, scale becomes a competitive advantage. Fourthly, network effects and high switching costs. Lastly, hybrid work, blockchain, IoT, AI, and 5G.

We see EQIX leveraging its strong U.S. franchise as well as its global footprint to drive deal wins on a global basis, which is a strategic advantage that other data centre companies are having an increasingly difficult time competing against.

2022 Results Summary:

• Revenues: Equinix achieved $7.263 billion in revenues, representing a solid nine per cent increase over the previous year.
• Operating income: The company reported $1.201 billion in operating income, an eight per cent increase from the previous year, with an operating margin of 17 per cent.
• Net income and net income per share: Equinix's net income increased significantly by 41 per cent from the previous year, reaching $705 million. Net income per share also showed a strong increase of 39 per cent, amounting to $7.67.
• Adjusted EBITDA: Equinix achieved an impressive adjusted EBITDA of $3.370 billion, with a margin of 46 per cent. This includes $20 million in integration costs.
• Adjusted funds from operations (AFFO) and AFFO per share: Equinix reported $2.714 billion in AFFO, which is an 11 per cent increase from the previous year on both an as-reported and normalized and constant currency basis. AFFO per share also showed a robust increase of nine per cent, amounting to $29.55, or a normalized and constant currency increase of 11 per cent. This includes $20 million in integration costs.
• Growth outlook remains strong, despite a broader slowdown in IT spending. EQIX continued its strong execution in fourth quarter 2022, achieving its seventh consecutive quarter of record channel bookings and highlighted its solid pipeline of new deals. Furthermore, management expects core revenue growth of between nine and 10 per cent in 2023 (excluding the impact of FX and higher power pricing) versus 10 per cent in 2022, and plans on investing in its quota-bearing salesforce in 2023. These two data points underscore the strong underlying demand for EQIX's services, despite the recent growth slowdown in cloud revenue and capex, in our view.

Cisco Systems (CSCO NASD)

Cisco provides infrastructure platforms, including networking technologies of switching, routing, wireless and data center products that are designed to work together to deliver networking capabilities, and transport and/or store data.

The company also offers collaboration products comprising unified communications, Cisco TelePresence, and conferencing, as well as the Internet of Things and analytics software. In addition, it provides security products, such as network security, cloud and email security, identity and access management, advanced threat protection and unified threat management products; as well as cloud and system management products.

The company was founded in 1984 and operations in over 100 countries. Cisco is the global market share leader of networking equipment and solutions with a comprehensive platform of offerings across networking, security, collaboration, applications and cloud.

Cisco has the widest offering of networking solutions among any of its key competitors, cementing its role as a trusted networking solutions provider, as well as a key procurement partner for its suppliers. Cisco's deep product backlog (~$14 billion as of F2Q23 versus normal levels of $4-5 billion) and growing annual recurring revenue (ARR) provides revenue visibility, as well as enabling Cisco to grow revenue beyond its normal range in F2023 (guidance of 9.0-10.5 per cent) and in early F2024.

Feb. 15, 2023:

• The network equipment provider announced its quarterly earnings, reporting $0.88 earnings per share. This surpassed the consensus estimate of $0.76 by $0.12.
• The company's revenue for the quarter was $13.59 billion, higher than the consensus estimate of $13.41 billion, with a 6.9 per cent increase compared to the previous year.
• Over the past year, Cisco Systems has generated $2.73 earnings per share and currently has a price-to-earnings ratio of 18.4.
• Analysts predict that the company's earnings will grow by 2.33 per cent in the upcoming year, increasing from $3.43 to $3.51 per share.

Check Point Software (CHKP NASD)

CHKP is an IT security solutions provider focusing on areas such as network security, endpoint security, mobile security, and security management. It is considered one of the legacy players in the security market and has faced intense competition over the past few years. CHKP has demonstrated signs of stabilization with several quarters of better billings growth following billings weakness into last year.

In addition to results for the past quarter, recent industry conversations and survey results reflect improving traction with resellers, better penetration with new products and tailwinds from elevated firewall demand. Valuation appears somewhat attractive, with stabilization of performance, we believe fundamentals will offer better downside support with risk-reward more balanced at these levels. It has restructured its offerings to improve its platform.

Its four offering groups:

• Network security: Serve 60 per cent of global 2,000 companies.
• Cloud security
• User and access security
• Security management and operations

Feb. 13, 2023:

• Check Point Software Technologies announced its earnings report, revealing quarterly earnings per share of $2.45, exceeding the estimated consensus of $2.36 by $0.09.
• The company's revenue for the quarter was $638.50 million, surpassing the analyst's expectations of $636.24 million, marking a 6.6 per cent increase compared to last year.
• Check Point Software Technologies had generated $6.33 earnings per share in the previous year and currently holds a price-to-earnings ratio of 19.6.
• The company's revenues are projected to grow by 10.22 per cent in the coming year, from $6.95 to $7.66 per share.

PAST PICKS: April 19, 2022

Microsoft (MSFT NASD)

• Then: $285.30
• Now: $279.10
• Return: -2%
• Total Return: -1%

Adobe (ADBE NASD)

• Then: $436.40
• Now: $376.11
• Return: -14%
• Total Return: -14%

Qualcomm (QCOM NASD)

• Then: $141.05
• Now: $123.99
• Return: -12%
• Total Return: -10%

Total Return Average: -8%