Shane Obata, portfolio manager at Middlefield Capital

FOCUS: Global Stocks

MARKET OUTLOOK:

Despite strong year-to-date gains for the broad indices, various growth-oriented areas of the market have underperformed including application software, healthcare IT and renewable power. In light of this pullback and the secular drivers underpinning the growth in these industries, we see an attractive entry point for many great businesses with positive long-term outlooks.

One area of the market which is highly attractive is food and agriculture. As the global population grows to approximately 10 billion by 2050, from less than eight billion today, overall food demand will need to increase by at least 50 per cent. This challenge comes with significant environmental implications since food production currently accounts for more than one quarter of global greenhouse gas emissions. As a result, we are focused on sustainable technologies that can facilitate this increase in food production while also reducing emissions. This represents a tremendous investment opportunity as we expect these new technologies to drive approximately over $1 trillion per year in new revenues by 2030.

TOP PICKS:

Netflix (NFLX NASD) - Purchased at US$507.02 on 21-Apr-21

Netflix reported lower-than-expected subscriber additions in the most recent quarter; however, we would caution against drawing conclusions from year-over-year comparisons against a pandemic period during which there was a significant pull forward in demand because everyone was stuck at home. The Netflix story is getting better, not worse. First, the fundamentals are improving as the company approaches cash flow positivity next year. This should alleviate concerns about the debt load and means that Netflix will no longer rely on external financing to grow. Second, Netflix provides tremendous value for customers, with the deepest library among the platforms and a long list of critically acclaimed content. Third, while the number of streaming services has increased, Netflix reiterated that its biggest competitor is linear/traditional TV. We believe that Netflix will remain the core application in our streaming libraries while it continues to take share from traditional TV.

Deere & Co. (DE NYSE) - Purchased at ~US$80 many years ago

John Deere is a leading manufacturing of equipment used in agriculture, construction and forestry. The stock has performed extremely well recently but we do not view it as expensive for a few reasons. First, Deere & Co. is becoming less cyclical as it marries its machines with internally developed precision ag. software that generates recurring revenues. Second, the company is the clear leader in the industry after making heavy investments into technology and improving its cost structure. Third, we believe the ag. equipment upcycle has more room to run. Farmer incomes are rising leading to greater optimism. In addition, used equipment inventories are at historically low levels and the average age of the installed base is the oldest in 20 years. All of this should lead to sustained demand for Deere machines, which have shown consistent pricing power over time. We are also impressed with the progress Deere is making in terms of sustainability. The company has reduced GDG emissions by 19 per cent since 2017. It is also sourcing nearly one third of its electricity from renewable sources. Finally, DE has recycled 28 million pounds of material through remanufacturing.

Taiwan Semiconductor Manufacturing (TSM NYSE) - Purchased at US$113.57 USD on 29-Mar-21

Taiwan Semiconductor Manufacturing is the world’s leading foundry. The company controls >60 per cent of global market share and has the most advanced technology. Taiwan Semiconductor Manufacturing sustainable advantage comes from strong execution leading to consistent demand. This allows for continued investment into R&D, which allows the company to maintain its technological leadership. They are well positioned for long-term growth, with high performance computing expected to take over as the main driver of demand post the smartphone era. Also significant upside potential from auto electrification, etc.

PAST PICKS: August 7, 2020

Alphabet (GOOGL NASD)

Still my favorite company in the world. Great performance year-to-date but still not expensive given high growth potential. Core business should continue to improve as the economy re-opens, with recovery in travel, etc. Rising emphasis on privacy actually bodes well for Google, which gathers data from its own properties. E-commerce platform is ramping up, with new partnerships with Shopify and others. Breakup value has become increasingly clear with YouTube continuing to improve. Also positive “option value” from Waymo and Other Bets.

• Then: $1,498.37
• Now: $2,381.03
• Return: 59%
• Total Return: 59%

Costco (COST NASD)

Stick with Costco for the long run. Costco provides an unrivaled value proposition for customers, with membership fees subsidizing costs. This is reflected in its extremely loyal customer base with a ~90 per cent renewal rate. Costco is classified as a Staple but also provides recovery potential through food court, optical/hearing and travel solutions. Costco is not expecting notable margin headwinds going forward (i.e. It has already passed through inflation in some products and categories).

• Then: $340.91
• Now: $379.35
• Return: 11%
• Total Return: 15%

ASML Holdings (ASML NASD)

We continue to like ASML. The company is uniquely well positioned to benefit from the global build-out of foundry capabilities. Intel recently announced that it will spend US$20 billion on two new chip factories while Taiwan Semiconductor has guided to US$100 billion in CapEx over the next three years. ASML remains the sole supplier of EUV tools, which clients will need to remain at the cutting edge.

• Then: $366.07
• Now: $676.93
• Return: 85%
• Total Return: 86%

Total Return Average: 53%

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Personal Twitter Handle: @sobata416

Company Website: www.middlefield.com