Shane Obata, portfolio manager at Middlefield Capital
Focus: Global equities

MARKET OUTLOOK

World markets continued to rally in June, with the S&P 500 and TSX finishing up 2 and 2.5 per cent respectively. While we expect the recovery in the global economy to continue, it's likely to be very uneven due the delayed re-opening of various industries as well as the recent spike in infections in areas including Texas, Florida, Arizona and California.

Stocks continue to move higher with interest rates expected to remain near historic lows for an extended period. Moreover, there is evidence that a number of market sectors have been positively impacted as a result of pandemic-induced acceleration of trends supporting their industries and business models. These include e-commerce, digital health and various industries leveraged to "working from home.” Not surprisingly, technology and healthcare are best positioned as these sectors have a history of developing long-lasting innovative solutions to address major social and economic challenges.

Shane’s latest outlook can be viewed here.

TOP PICKS

Alphabet (GOOGL NASD)

Purchased at US$1,506.28 on July 15, 2020

My favorite company in the world. Q2 was a good quarter for Alphabet despite weakness in travel and hospitality. Its sales are already massive, but it’s still expected to grow sales at about 20 per cent through 2020. There is still potential for Google to capture more share in advertising. They have new opportunities in Maps monetization, ecommerce (deep linking, showcase), and its other bets such as Waymo may surprise us. Regulatory risk is a concern, but it’s difficult to envision sweeping changes given how much utility they provide. We’re comfortable paying a premium for Alphabet’s ecosystem and remarkable growth given its scale.

Costco (COST NASD)

Purchased at US$339.31 on Aug. 4, 2020

Costco is a core holding in the staples sector that performs well no matter the economic environment. Revenues have increased in each of the past 20 years aside from a small decline during the financial crisis. Costco has unrivaled value proposition for consumers, reflected in a gross margin of 13.46 per cent and its extremely high membership retention and renewal rate. The company has a major focus on employees, reducing turnover, increasing satisfaction and offering above-industry compensation levels. Costco has a rapidly growing online business, with e-commerce sales rising 75.3 per cent year-over-year in July. It’s trading at a big premium to its peers, but we’re comfortable paying it for its high quality and growth potential.

ASML Holdings (ASML NASD)

Purchased at US$370.55 on Aug. 4, 2020

ASML has an effective monopoly position in extreme ultraviolet lithography (EUV), a cutting-edge technology for printing semiconductor chips at lower nodes. This allows for production of more powerful (higher granularity) and lower cost (single exposure) chips. The extreme complexity of the process is reflected in the price: a current machine (3400C) costs €130 million, while the current backlog is worth almost €10 billion (54 machines). A next-generation machine (“High NA”) costs €270 million; ASML has already sold eight options to buy it. The stock’s short-term outlook is cloudy due to Intel woes. That said, ASML is still likely to fully utilize capacity in 2022. ASML supplies to TSM and Samsung, both of which are high-quality, low-risk clients. ASML is perpetually expensive, but deserves to trade at a premium due to its technological advantage. The target price of €500 by 2025 seems reasonable.

PAST PICKS: MARCH 20, 2020

SONY (SNE NYSE)

Sony is heavily undervalued as a result of massive conglomerate discount. It’s still trading at a slight premium to its peers, but we are comfortable paying for access to multiple secular growth themes and potential multiple expansion.

• Then: $53.06
• Now: $80.17
• Return: 51%
• Total return: 51%

ORSTED (ORSTED OMX)

Ranked as the world’s most sustainable company by Corporate Knights, Orsted is the largest owner, operator and developer of offshore wind (25 per cent market share). The industry is highly attractive due to high load factors, falling costs and scalability. Orsted is trading at a big premium to its peers, but we’re comfortable paying a premium for a key beneficiary of the shift to green power.

• Then: 606.40KR
• Now: 894.40KR
• Return: 47%
• Total return: 47%

ALPHABET (GOOGL NASD)

• Then: $1068.21
• Now: $1502.58
• Return: 41%
• Total return: 41%

Total return average: 46%