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

MARKET OUTLOOK

Joe Biden is set to become the next president of the U.S. while the Republicans are still favoured to retain control of the Senate, thereby providing a counterbalance against the probable widespread increases in taxes and government regulations. In addition, we expect fiscal and monetary policy to remain highly supportive, especially with the nomination of Janet Yellen for Treasury secretary.

The COVID situation remains delicate, with cases rising globally in November and December. Investors, however, are beginning to look beyond the worrying statistics and government mitigation measures due to recent positive news on vaccines.

Collectively, investors have welcomed these developments. While we have not abandoned our favorite secular growth themes, we are growing increasingly confident that select cyclicals will continue to outperform as the global economy gradually reopens and recovers.

TOP PICKS

Alphabet (GOOGL NASD) Most recent purchase at US$1,506.28 on July 15.

(Still) my favorite company in the world. Good quarter in Q3/20 (positive rev. surprise of +8 per cent), with most geographies/verticals recovering. Nineplatforms with over 1 billion users (Android, YouTube, Chrome, Search, Maps, Play, Drive, Gmail, Photos). Already massive but still expected to grow sales at 20 per cent through 2022. Still potential for Google to capture more share in advertising (trade spend, etc.). New opportunities: Maps monetization, e-commerce (deep linking, showcase, etc.). Other bets may surprise us (Waymo, Deep Mind, etc.). Regulatory risk a concern; however, difficult to envision sweeping changes given how much utility provided. BF P/E of 25.88 is 2SD above five-year average. Still offers relative value versus most peers. Comfortable paying these prices for ecosystem and remarkable growth given scale.

Enel (ENEL BIT) Most recent purchase at 7.32 euros on Nov. 4.

Top pick for the global transition to clean energy, a theme we believe has multi-decade tailwinds. Europe is especially attractive, given heavy policy support (e.g. The Green Deal). Enel is the biggest utility in the STOXX 600, with a market cap of 85 billion euros and a dividend yield of over 4 per cent. Based in Italy but well diversified across operations in more than 30 countries. One of the largest renewable developers in the world, with nearly 44 GW of installed green capacity and plans to nearly triple that to 120 GW by 2030. Also provides exposure to growth areas such as green hydrogen and electrification of heating and mobility, both of which will necessitate significant spending on upgrading power grids. Robust balance sheet, ample liquidity and strong FCF generation should provide ample funding for growth. BF P/E of 15.5 is 2SD above 5Y average; however, the company remains undervalued. Enel trades at a wide discount to global peers such as NEE (30.2) and Iberdrola (19.6)

Uber (UBER NYSE) Most recent purchase at US$52.04 on Dec. 15.

Global leadership in two secular growth industries, food delivery and ridesharing. Uber Eats a bright spot during the pandemic, with 134 per cent growth in gross bookings in Q3/20. Largest and fastest-growing food delivery business globally (ex-China). Ridesharing still under pressure but will likely emerge stronger post-pandemic. Leader in many markets (North America, Latin America, Europe, etc.). Equity stakes in others (Didi in China, Grab in Southeast Asia, Yandex in Russia).

Potential for expansion into new areas such as grocery and package delivery. Focus on profitability, with Uber expected to turn EBITDA positive in 2021. Sufficient liquidity to make that happen, with $7 billion in cash as of Q3/20. Major re-rating potential due to significant de-risking of the business. Prop 22 was approved in November (i.e. Drivers remain classified as independent contractors). Encouraging vaccine news has allowed investors to look past COVID.

PAST PICKS: OCT. 30, 2020

Alphabet (GOOGL NASD)

• Then: $1,616.11
• Now: $1,751.33
• Return: 8%
• Total Return: 8%

Advanced Micro Devices (AMD NASD)

• Then: $75.29
• Now: $91.98
• Return: 21%
• Total Return: 21%

Prologis (PLD NYSE)

• Then: $99.20
• Now: $99.08
• Return: -1%
• Total Return: 0%

Total Return Average: 10%