Kim Bolton's Top Picks
FOCUS: Technology stocks
Remember back in early October when the major equity indices were in the midst of its first 5+ per cent pullback in over a year and the earnings season was about to start? The general tone in the market was that labour shortages, disrupted supply chains, and inflation were all causing havoc on the operating environment for companies and would provide a dreadful backdrop for the upcoming reporting period.
Early on in earnings season, though, we thought that while the headwinds that companies were facing weren’t immaterial, the fact that they were so front and centre in everyone’s mind, suggested that they were already largely priced in. Fast forward to the closing days of November and the worst fears of earnings season not only failed to materialize, but we’re actually just wrapping up one of the best earnings seasons since 2010.
Although we were early (and wrong) expecting a summer stock market correction, we believe U.S. Fed wariness of asset bubbles, combined with Biden/Yellen concerns about inflation (which threatens Senate BBB support, the timing of a debt ceiling bill, and the midterms), have changed market risk sentiment.
We calculate that a bubble driven by current central bank real yield repression may take the S&P 500 from the current 4,700 to 5,500 mid-2022 and 6,750 by mid-2023, creating a systemic risk when it bursts. The solution is a moderately more hawkish Fed tilt which raises the real 10Y real (TIPS) yield, strengthens the dollar, lowers inflation, tightens financial conditions and reduces valuation for this over-extended market. We’re not sure how deep the current stock market correction will be, but we are sure stock markets are very vulnerable to downside pressures.
In this environment, we have positioned the BSD Global Tech Hedge Fund with the expectation of more market volatility; the Fund is 85 per cent invested across a couple dozen tech vendors and tech end-users, with a 75 per cent short equity indices hedge on the invested stock portfolio, that will incrementally grow (with a ‘laddered’ Nasdaq put option position) if the market deteriorates.
Micron Technology (MU NASD)
Provides memory and storage technologies with DRAM products, which are dynamic random access memory semiconductor devices with low latency that provide high-speed data retrieval; NAND products which are non-volatile and rewritable semiconductor storage devices; and NOR memory products, which are non-volatile re-writable semiconductor memory devices that provide fast read speeds under the Micron and Crucial brands.
The company operates through four segments: Compute and Networking Business Unit, Mobile Business Unit, Storage Business Unit, and Embedded Business Unit. With the continuous investment in R&D and the unique position of having all NAND, DRAM, and 3D XPoint technologies, Micron will keep delivering better and more advanced products to meet growing customers’ demands. Expected to see ‘high-teens’ industry demand growth for this year. Two thirds of Microns business is in DRAM.
Dingdong Limited (DDL NASD)
Dingdong is a leading online grocery delivery company in China, providing 30-minute delivery services in tier 1 and 2 Chinese cities. Rapid commerce is growing massively around the world, propelled by increased digitization brought on by the pandemic. Potential $1 trillion market globally, and Dingdong is the leader in China, the world’s largest market. Q3 revenues have grown 111 per cent Y/Y, 33 per cent Q/Q.
Recently shifted focus from growth to efficiency, for a faster pace to profitability. Gross margin improved to 18.6 per cent; further improvement expected through high margin private label products and increased density of warehouses (already 1,375) in existing cities, thereby shortening delivery time for greater efficiency.
Paypal (PYPL NASD)
PayPal is extremely well-positioned to benefit from all aspects of growth in and around digital payments, commerce, and services. PayPal is a winner in the new economy as transaction volumes soar. Payments from digital wallets are expected to outpace that of cards worldwide. Europe’s adoption of PayPal as the preferred method of payment over cards is evident in countries such as Germany, France, and Italy.
They are becoming more of a presence in physical retail through the implementation of QR codes at the point of sale. Major retailers that are implementing this are CVS and Nike. PayPal’s presence on the merchant side gives them access to merchant sales data, as well as consumer spending data. Teaming up with Amazon to enable customers in the U.S. to pay with Venmo at checkout. Starting next year, customers will be able to make purchases on Amazon.com and the Amazon mobile shopping app using their Venmo accounts.
In October, closed the acquisition of Paidy, a leading two-sided payments platform and provider of buy now, pay later solutions in Japan for approximately $2.7 billion, principally in cash. The acquisition of Paidy will enhance PayPal’s capabilities and relevance in the domestic payments market in Japan, the third-largest ecommerce market in the world. Expanded cryptocurrency product offerings, launching the ability to buy, hold, and sell cryptocurrency in the UK and rolling out Cash Back to Crypto, a new way for Venmo credit card customers to automatically purchase cryptocurrency from their Venmo account using cash back earned from their card purchases. On the 3Q21 earning report PayPal missed the 4Q21 guidance and the stock is drifting down ever since.
PAST PICKS: November 24, 2020
JD.com (JD NASD)
- Then: $89.82
- Now: $89.36
- Return: -1%
- Total Return: -1%
Oracle Corp. (ORCL NYSE)
- Then: $57.57
- Now: $93.58
- Return: 63%
- Total Return: 65%
Asana (ASAN NYSE)
- Then: $22.88
- Now: $106.80
- Return: 367%
- Total Return: 367%
Total Return Average: 144%