Oct 9, 2020

Shane Obata's Top Picks: Oct. 9, 2020

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Shane Obata's Top Picks

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

MARKET OUTLOOK

Global equities pulled back in September with MSCI World, the S&P 500 and the TSX declining 3.4, 3.8 and 2.1 per cent respectively. The major reasons for the sell-off include an increase in COVID-19 cases in North America and Europe, the growing likelihood of a Democratic sweep in the U.S. election and a correction in the market-leading technology sector. Notwithstanding the pullback, we remain constructive on the overall market and view the current drawdown as a healthy correction in a largely uninterrupted run since the March lows. While we may see higher market volatility heading into the election, there are multiple reasons to remain invested in equities. Monetary policy is extremely accommodative and will remain so until the middle of the current decade.

Fiscal policy has also been very supportive and we expect more stimulus in 2020. While negotiations have stalled, Trump’s COVID-19 diagnosis could become a catalyst for the White House and Congress to compromise on a new stimulus bill more quickly. In addition, we are positive on the progress of various healthcare initiatives. We have seen a significant ramp-up in testing, with multiple countries such as Canada, the U.S. and the WHO signing deals to purchase and deploy hundreds of millions of rapid tests. Furthermore, multiple companies are undergoing late-stage vaccine trials and will likely present phase 3 data in Q4/20.

Joe Biden performed better than expected during the first debate, cementing his lead going into the final stretch. While a Democratic sweep could have a negative impact on equity market sentiment as it increases the likelihood of higher taxes and regulation, we do not believe this outcome should cause a major move out of equities, especially given the Democratic Party’s plan to significantly increase fiscal spending in the coming years.

TOP PICKS

Shane Obata's Top Picks

Shane Obata, portfolio manager at Middlefield Capital discusses his Top Picks: Costco, ASML Holdings and Alphabet.

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

Still my favorite company in the world, Alphabet had a good second quarter despite weakness in travel and hospitality. Google owns nine platforms with over one billion users. It’s already massive, but it’s still expected to grow sales by 20 per cent through 2022. There’s potential for Google to capture more share in advertising. New opportunities include Maps monetization, e-commerce and other bets which may surprise us (Waymo, for example). Regulatory risk is a concern, but it is difficult to envision sweeping changes given how much utility is provided. We are comfortable paying these prices for Alphabet’s ecosystem and remarkable growth given its scale.

Advanced Micro Devices (AMD NASD) Most recent purchase US$78.48 on Sep. 4

AMD is a leading semiconductor company that operates in three large and growing markets: Data centres, PCs and gaming. AMD has industry-leading innovation and performance across multiple segments. It will likely extend its lead as it releases new products at an aggressive cadence. AMD’s main opportunity is to continue taking CPU market share from Intel, especially on the server side. It’s trading at a big premium to its peers; that said, we are comfortable paying a premium for high quality and growth potential.

Prologis (PLD NYSE) Most recent purchase at US$85.99 on April 15.

Rising e-commerce adoption creates the need for more industrial real estate (warehouses). Prologis provides ultra-high-quality exposure to this industry. This is the second-largest REIT in the world, with nearly one billion square feet in its portfolio; 600 million are in the U.S., making it nearly four times bigger than its next competitor. $2.2 trillion in goods flow through Prologis distribution centres each year (2.5 per cent of global GDP). It’s got a clean balance sheet, consistent dividend growth and the lowest cost of debt in the REIT industry. Prologis is trading at a big premium to its peers; that said, we are comfortable paying a premium for high quality and peer-leading growth potential.