Kim Bolton, president and portfolio manager of Black Swan Dexteritas

FOCUS: Technology stocks

MARKET OUTLOOK:

Driven by concerns about rising inflation and interest rate increases by the U.S. Federal Reserve, global financial markets declined in January and the first three weeks of February. Global equity market declines were led by U.S. equities, with the steepest declines across technology, cyclicals and healthcare, which were only partially offset by gains in energy.

Market volatility continued into February, with the VIX (the volatility index) holding above 20. Despite market gyrations, stock markets slipped only modestly until the last week of February.

Although a Russian incursion into Ukraine had been widely anticipated, investors appeared surprised by Russian President Putin’s decision to launch a broad-scale invasion beyond the breakaway Donbass region. The near-term direction of the stock markets will be dependent on whether the Russia-Ukraine conflict concludes diplomatically or, God forbid, a ‘fight to the end’.

In the medium-term (i.e. the next few months), because inflationary pressures look to force an aggressive tightening of monetary policies by the world’s central banks, the modus operandi will be a ‘sell the rallies’ strategy.

We have been very defensive in both the BSD Fund and our Separately Managed Accounts. What I mean by defensive is - the long stock portfolios are neutralized by short equity index positions; the unrealized losses in the stock portfolios are offset by unrealized gains on the short equity index positions. The upside in the stock portfolios is increasing, and when the geopolitical and inflationary uncertainties ease, then it will be time to book the unrealized gains on the short equity index positions.

In this environment, we have positioned the BSD Global Tech Hedge Fund with the expectation of more market volatility. The Fund is 84 per cent invested across a couple dozen tech vendors and tech end-users, with a 91 per cent short equity indices hedge on the invested stock portfolio, which will incrementally grow (with a ‘laddered’ Nasdaq put option position) if the market deteriorates.

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TOP PICKS:

Alphabet Inc. Class A (GOOGL NASD)

• PT - $3,328.20 Market Cap - B$1,671.95 Price - $2,527.57
• We see GOOGL as one of the best-positioned companies to benefit from secular trends in digital advertising, as advertisers continue to see solid returns on spend and the company continues to innovate on its search, display, and YouTube platforms. Alphabet’s revenue comes from Google Advertising, which remains the primary source of income.
• In addition, we think non-advertising revenue streams – including sales from Google Cloud, Hardware (the Project Soli, a miniature radar, will be a game changer for Pixel and Pixel Watch), Google Play and Waymo – will become a more central part of the investment thesis over time.
• We also believe that the margin impact of growth in those lower gross-margin ventures will be offset by operating leverage as the overall business continues to grow, driving earnings growth above revenue growth over the next several years.
• 80+ per cent of revenue comes from ‘Google Search’, with 97+ per cent of profits coming from advertising primarily from keyword searches.
• Google holds the most net cash out of all companies, which gives them flexibility in the future to perform buybacks (similar to Apple) which increases their EPS.
• Alphabet reported December 2022 quarter earnings and revenue that topped analyst estimates and announced a 20-for-1 stock split.
• For full-year 2021, the company saw a 41 per cent y/y jump in revenue to $257 billion. The company reported revenue of $75.3 billion in the 4Q2021, up 32 per cent from the year earlier.
• Alphabet’s Google reached a deal to acquire Mandiant the cybersecurity software and services company, for $23 a share in cash. The acquisition is valued at about $5.4 billion, inclusive of Mandiant’s net cash.
• 30 Days performance: -9.21 per cent. 100 Days performance: -13.16 per cent
• Buy one-third of a position here at ~ $2,527.57 add at ~ $2,401.19 and ~ $2,274.81

Intel Corp. (INTC NASD)

• PT - $59.68 Market Cap - B$194.11 Price - $47.68
• 5 reasons why BSD thinks Intel is still an interesting investment over the next 5 years:

1. Intel’s breadth of product line gives it a huge advantage going forward
2. Intel has added to its capabilities via acquisition every year for the last 5 years.
3. Intel is a free cash flow machine
4. Intel’s enviable gross margin (remember Intel manufactures most of its own chips).
5. Intel is a leader in CPUs and Autonomous Vehicle chips

• Intel’s Tiger Lake chips will likely crush the competition.
• Intel’s poor performance is due to their difficulties with their manufacturing process. They have not been able to deliver on their 7nm process, while their competitors (AMD) have outsourced their manufacturing to TSMC who have already begun development on their 5nm process.
• Recently announced a GPU offering
• Intel has decided to separate Mobileye, its self-driving car unit.
• Intel confidentially filed to take Mobileye public and, according to reporting from The Wall Street Journal, its valuation could reach as high as $50 billion.
• 30 Days performance: -1.04 per cent. 100 Days performance: -4.64 per cent.
• Buy one-third of a position here at ~ $47.68 add at ~ $45.30 and ~ $42.91

Datadog Class A (DDOG NASD)

• PT - $222.48 Market Cap - B$40.84 Price - $130.11
• Datadog develops monitoring and analytical solutions for dev, ops and businesses. Through its SaaS platform, it allows for automated infrastructure monitoring across the entire technology spectrum. This allows for monitoring, fixing issues, automation, among others. Typically this results in shorter time frames for trouble shooting items and improve time-to-market.
• DDOG is a leader in Gartner’s “application monitoring” space.
• Continually adding to their platform, they recently acquired Sqreen which is a security company that adds in-app web application firewall capabilities.
• DDOG’s ~85 per cent y/y revenue growth puts it in the highest echelon of growth stocks in the enterprise software sector. It’s also free cash flow-positive and growing its operating margins consistently.
• 30 Days performance: -14.75 per cent. 100 Days performance: -26.50 per cent
• Buy one-third of a position here at ~ $130.11 add at ~ $123.60 and ~ $117.10

PAST PICKS: March 31, 2021

BYD Company (BYDDY OTC)

• Then: $43.27
• Now: $49.87
• Return: 15%
• Total Return: 15%

Infineon Technologies (IFNNY OTC)

• Then: $42.29
• Now: $31.29
• Return: - 27%
• Total Return: - 26%

Sony (SONY NYSE) – ADR

• Then: $106.01
• Now: $97.46
• Return: - 8%
• Total Return:  - 8%

Total Return Average: - 6%