Kim Bolton, president and portfolio manager, Black Swan Dexteritas

FOCUS: Technology stocks 


If you thought things were going to calm down after the U.S. midterms, think again. No later than two days after Americans voted, financial assets of all types had what were some of the most extreme moves in years. Last Thursday, the 10-year U.S. Treasury yield had the seventeenth most extreme downside move (normalized to the last 200 trading days) since 1980. The S&P 500 had the fifteenth largest one-day rally since 1980, and the U.S. Dollar Index had its ninth-largest daily decline over that same span.

Investors have been through a lot over the last several years, but Thursday ranked right up there with all of them and we’re not even including the “you-know-what” show that’s been going on at Twitter! All we can say is that thankfully the moves in stocks and bonds were up rather than down. The siesta from selling was welcomed by weary bulls, but besides Wednesday’s weak consumer price index (CPI) report, not a whole lot changed.

From strictly a technical perspective, the downtrend that has been in place all year remains intact. The political makeup of Congress has yet to be officially determined but looks like it will change only marginally. Although, any amount of gridlock that comes from a slim Republican majority in the House should help to keep spending in check. The U.S. Federal Reserve is still actively rooting for a weaker stock market and economy. Based on the commentary after Thursday’s CPI index report, its position doesn’t look to have changed much, and higher interest rates continue to suffocate the economy.

The burden of proof still remains firmly on the bulls, but not everything out there is horrible. Semis had a monstrous week and are closer to breaking downtrends than the broader market is. Internals have been improving as the list of stocks making new lows continues to shrink and the percentage of stocks trading above 200-DMA expands to a majority. On the inflation front, Thursday’s CPI was just one report, and three months ago there was a similar scenario only to be followed by two straight months of stronger-than-expected reports. What’s different this time, though, is that most secondary measures of inflation have been showing weaker momentum for several months now.

Up until about the middle of October, your Black Swan Dexteritas team was very defensive, via an overweight short equity index overlay on our portfolios, but currently your BSD team is more constructive on the stock market and we have an underweight hedge and a fully invested stock portfolio. However, we have also learned to be agile and listen to the market’s momentum.

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Kim Bolton’s Top Picks

Kim Bolton, president and portfolio manager of Black Swan Dexteritas, discusses his top picks: Netflix, Palo Alto Networks, and STMicroelectronics N.V.

Netflix (NFLX NASD)

  • The company has approximately 223 million paid members in 190 countries.
  • Netflix is buying Spry Fox, a Seattle-based independent gaming studio focused on cozy games, extending its push into video games.
  • In July 2021 Netflix announced its expansion into interactive entertainment, and its plans to bundle games into its existing TV and film subscription service.
  • Netflix acquired its first games developer, Night School Studio, in September 2021.
  • Netflix has 35 mobile games and 18 interactive-video options available now.
  • Netflix’s ad tier launched on Nov. 3, 2022:
    • The company's ad plan, "Basic with Ads," will cost $6.99 a month in the U.S. just ahead of Disney's ad-based offering on Dec. 8 (which will be priced at $7.99.)
    • "Basic with Ads" will complement Netflix's existing ad-free tiers, and be available in 12 countries, including the U.S., the U.K., Australia, Brazil, Canada, France, Germany, Italy, Japan, Korea, Mexico, and Spain.
  • Third-quarter 2022 update:
    • Netflix's quarterly revenue grew six per cent year-over-year (and 13 per cent in constant currency) to $7.93 billion. This result exceeded the $7.85 billion Wall Street consensus estimate.
    • Revenue growth was driven by a five per cent increase in average paid subscriptions and a one per cent rise (eight per cent in constant currency) in average revenue per subscriber.
    • In the third-quarter, paid net subscriber growth was 2.41 million. That's down from 4.4 million in the year-ago period but much better than the one million the company had forecast and analysts were expecting. Netflix ended the quarter with 223.09 million global paid subscribers, up about five per cent year-over-year.
    • The third-quarter was the first one this year that paid subscribers count grew, as it declined about 200,000 and 970,000 in the first and second-quarters, respectively.
    • Net income was $1.4 billion, or $3.10 per share, down three per cent from the year-ago period. This result surpassed the earnings per share (EPS) of $2.13 that analyst had expected.
    • In the fourth-quarter, management expects 4.5 million paid net sub additions.

Palo Alto Networks (PANW NASD)

  • The company offers firewall appliances and software; Panorama, a security management solution for the control of firewall appliances and software deployed on an end-customer's network and instances in public or private cloud environments. It also provides subscription services covering the areas of threat prevention, malware and persistent threat, uniform resource locator filtering, laptop and mobile device protection, and firewall. Additionally it provides DNS security, internet of things security, SaaS security API, and SaaS security inline, as well as threat intelligence, and data loss prevention.
  •  Also, the company offers cloud security, secure access, security analytics and automation, and threat intelligence and cyber security consulting.
  • PANW is a leading network security provider whose legacy on-premise business continues to perform relatively well as the network security market changes.
  • PANW is aggressively developing and acquiring next-gen security solutions and successfully introducing them to the market.
  • Valuation is modest given its market leadership position, especially compared to peers like Zscaler and Crowdstrike which offer similar services.
  • Palo Alto is scheduled to report its first-quarter fiscal 2023 results on Nov. 17, 2022.
    • Palo Alto projects its fiscal first-quarter revenues in the $1.535-$1.555 billion range, suggesting a year-over-year increase of 23-25 per cent.
  • The growing and accelerated migration to the cloud in a post-pandemic era is likely to have boosted the adoption of the aforementioned platforms. The company projects year-over-year billings growth between 22 per cent and 23 per cent ($1.68 billion-$1.70 billion) during the to-be-reported quarter.
  • Moreover, increased use of cloud and remote networks amid a hybrid working environment has resulted in escalating cyberattacks currently. This is leading to a rise in demand for cybersecurity solutions. PANW’s fiscal first-quarter performance is likely to have benefited from this demand surge.
  •  Furthermore, Federal Risk and Authorization Management Program (FedRAMP) recognitions are boosting the adoption of Palo Alto’s products by government organizations. The company’s Prisma Access, Cortex XDR, Cortex Data Lake, Prisma Cloud and WildFire received FedRAMP recognitions.

STMicroelectronics N.V. (STM NYSE)

  • The company operates through Automotive and Discrete Group; Analog, MEMS and Sensors Group; and Microcontrollers and Digital ICs Group segments.
    • The Automotive and Discrete Group segment offers automotive integrated circuits (ICs); and discrete and power transistor products.
    • The Analog, MEMS and Sensors Group segment provides industrial application-specific integrated circuits (ASICs) and application-specific standard products (ASSPs). It also provides general-purpose analog products, custom analog ICs, wireless charging solutions, galvanic isolated gate drivers, low and high-voltage amplifiers, comparators and current-sense amplifiers. Additionally, it provides MasterGaN, a solution that integrates a silicon driver and GaN power transistors in a single package; wireline and wireless connectivity ICs, touch screen controllers, micro-electro-mechanical systems (MEMS) products including sensors or actuators and optical sensing solutions.
    • The Microcontrollers and Digital ICs Group segment offers general purpose and secure microcontrollers, radio frequency (RF), electrically erasable programmable read-only memories and RF, digital, and mixed-signal ASICs.
  • STMicroelectronics is a leader in automotive Silicon Carbide (SiC), with access to a key growing customer and pursuing a vertical integration strategy.
    • STMicroelectronics is supplying Tesla, which is one of the largest mass-market auto production programs using SiC today, thereby giving STM credibility in the market, but also affording it scale benefits.
    • STMicro targets to reach >US$1bn of SiC revenues by 2023, with a 75 per cent/25 per cent split between automotive and industrial SiC applications.
    • Goldman Sachs forecasts the company to achieve total xEV semis revenue of US$0.9bn in 2022, growing at a 22 per cent CAGR to US$1.6bn in 2025. Given STM’s leading position in the autos SiC market, Goldman Sachs sees auto SiC revenues growing at a 26 per cent CAGR to US$1.1bn by 2025, representing 70 per cent of the incremental growth in xEV semis revenues.
  • STMicroelectronics reported third-quarter fiscal year 2022 revenue growth of 35.2 per cent year-on-year to $4.32 billion, beating the consensus of $4.24 billion.
    • Sales to OEMs increased by 34.1 per cent year-over-year and distribution sales improved by 37.4 per cent year-over-year.
    • Automotive and Discrete Group (ADG) revenue rose 55.5 per cent year-over-year to $1.56 billion. Analog, MEMS, and Sensors Group (AMS) revenue increased by 9.7 per cent year-over-year to $1.38 billion. Microcontrollers and Digital ICs Group (MDG) revenue grew 47.7 per cent year-over-year to $1.37 billion.
    • Outlook: STMicroelectronics sees fourth-quarter revenue at the mid-point of $4.40 billion, up 23.7 per cent year-over-year.
    • STMicroelectronics sees fiscal year 2022 revenue at the mid-point of $16.10 billion, up 26.2 per cent year-over-year.
  • STMicroelectronics N.V. was incorporated in 1987 and is headquartered in Geneva, Switzerland.




PAST PICKS: November 25, 2021

Kim Bolton’s Past Picks

Kim Bolton, president and portfolio manager of Black Swan Dexteritas, discusses his past picks: Micron Technology, Dingdong Cayman, and Paypal.

Micron Technology (MU NASD)

  • Then: $86.21
  • Now: $59.87
  • Return: -31%
  • Total Return: -30%

Dingdong Cayman (DDL NYSE)

  • Then: $23.26
  • Now: $4.2
  • Return: -82%
  • Total Return: -82%

Paypal (PYPL NASD)

  • Then: $188.71
  • Now: $86.42
  • Return: -54%
  • Total Return: -54%

Total Return Average: -55%