Mar 20, 2020

Shane Obata's Top Picks: March 20, 2020

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Full episode: Market Call for Friday, March 20, 2020

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

MARKET OUTLOOK

As corporate and political leaders attempt to control the spread of COVID-19 by imposing various preventative measures including social distancing, the market is undergoing an accelerated de-rating in price-to-earnings multiples and investors have been lowering their earnings estimates in anticipation of softer demand in the first half of 2020. In response, both the Federal Reserve and Bank of Canada have significantly cut interest rates and are enacting other forms of policy to support economic activity. While the virus continues to spread throughout many countries, we’re encouraged by the progress made in Asian countries such as China and South Korea.

On the political front, Joe Biden emerged as the favourite to win the Democratic nomination versus more socialist candidates following an impressive showing on Super Tuesday. It is also worth noting that the likelihood of Donald Trump winning a second term has dropped in recent weeks due to the market turbulence.

We continue to monitor all of the foregoing factors closely and although we expect headline-driven volatility to continue in the near term, we believe investors should remain calm and focused on defensive real assets and secular growth companies. While our cash positions are currently higher than normal, we will be selective and prudent in redeploying capital as further clarity on COVID-19 and economic activity emerges.

TOP PICKS

Shane Obata's Top Picks

Shane Obata of Middlefield Capital shares his top picks: Alphabet, Sony and Orsted.

ALPHABET (GOOGL NASD)
Purchased at US$1,136.63 on March 13.

This is my favorite company in the world. Alphabet has nine platforms with over 1 billion users: Android, YouTube, Chrome, Search, Maps, Play, Drive, Gmail and Photos. It’s already massive but it continues to grow sales at about 20 per cent. There’s still potential for Google to capture more share in advertising (trade spend). It also has new opportunities in Maps monetization and e-commerce (deep linking, showcase), while its “other bets” like Waymo may surprise us. Regulatory risk is a concern, but it’s difficult to envision sweeping changes given how much utility Alphabet provides.

SONY (SNE NYSE)
Purchased at US$53.53 on March 13.

Sony owns a world-class semis business with 80 per cent exposure to image sensors (a big deal in mobile cameras). The stock is heavily undervalued due to massive conglomerate discount.

Its premier gaming franchise is shifting from hardware to software, though it’s worth noting 60 per cent of console games are still physical. Sony is also one of the Big 3 in music, owning about one-third of all music in existence. It also has a deep film and TV library, with titles such as Spider-Man, Jumanji and Breaking Bad. The company is restructuring its electronics business, which still has a good name in home entertainment. It could also sell listed stakes in Sony Financial to fund growth investments, M&A and buybacks.

ORSTED (ORSTED OMX)
Purchased at 598.55 Danish kroner on March 13.

Orsted is an ESG leader, ranked as the world’s most sustainable company in 2020 by Corporate Knights. It’s the largest owner, operator and developer of offshore wind, with 25 per cent market share. The industry is highly attractive due to high load factors, falling costs and scalability. The company is well positioned to benefit from supportive policy due to its expertise in development, construction and operation. The industry is maturing, but we expect sustainable growth as the company expands into other markets. Orsted is projecting EBITDA growth of about 20 per cent through 2023.