Kim Bolton, president and portfolio manager, Black Swan Dexteritas

FOCUS: Technology Stocks 

MARKET OUTLOOK:

For July, the S&P 500 Index gained about three per cent, the Nasdaq Composite added about four per cent and our BSD Global Tech Hedge Fund advanced 2.5 per cent. For the first seven months of 2023, the Nasdaq Composite exploded 35 per cent higher, and the S&P 500 Index soared 19 per cent, while the Dow Jones Industrial Average added a more modest seven per cent.

The are many catalysts for these year-to-date outsized returns, with slowing inflation, the U.S. Federal Reserve’s liquidity response to the spring 2023 regional banking crisis and the generative AI craze near the top of the list. After surging for most of the spring and early summer, global stock markets have taken a breather so far this month. The action has been typical from a seasonal perspective since August has historically been a time of year when the tape is weak and the action is heavy.

The biggest event to occur this past week from a technical perspective was the Nasdaq Composite breaking and closing below its 50-day moving average for the first time in 103 trading days dating back to March. Within the Nasdaq Composite, four mega-caps have also seen their 50-day moving average recently give way: Apple, Microsoft, NVIDIA and Tesla. While the tape has been heavy, the S&P 500 managed to close this past week one per cent above its 50-day moving average.

Had a new high not been made in the broad market indexes in July, we would be much more concerned about a double top. Instead, what we could see happening is a consolidation phase forming with sideways action over the next few months during this weak seasonal period. If we do see that instead of a further breakdown, it would form the “handle” of what would be a nice cup and handle formation that is ultimately viewed as a bullish long-term technical pattern. While the market searches for the next fundamental catalyst or technical signal, your BSD portfolio management team will continue to trim those securities that are achieving respective intrinsic values, and buy those stocks that exhibit longer, more lucrative investment runways. The hedging overlay will always be an important tool to protect your capital in bearish markets, and also an important tool to be dialed down in bullish markets.

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TOP PICKS:

Advanced Micro Devices (AMD NASD)

AMD develops computer processors and related technologies for business and consumer markets. It operates in four segments, including data center, client, gaming, and embedded segments. The company offers x86 microprocessors and graphics processing units (GPUs) as an accelerated processing unit, chipsets, data center, and professional GPUs. It also offers embedded processors, and semi-custom system-on-chip (SoC) products, microprocessor and SoC development services and technology, data processing units, field programmable gate arrays (FPGA), and adaptive SoC products.
 

ServiceNow (NOW NYSE)

ServiceNow develops a cloud computing platform to help companies manage digital workflows for enterprise operations. IT was founded in 2003, and since its 2012 initial public offer (IPO) the company has strategically acquired 16 companies to be the go-to company for “incident, problem, and change” IT operational events.

Given the strong moat, we expect ServiceNow to post growth of at least 23 per cent CAGR until 2025. The company has a unique combination of a core IT service management and operations business, which together comprise roughly 70-75 per cent of revenues. In our view, ServiceNow scores very well in many aspects of our framework, particularly a very large TAM of ~$220 billion. It also has the benefit of diversity in secular themes as enterprises undergo digital transformations and adopt devops practices and automated digital workflows.
It is also teaming up with Nvidia and Accenture on a new program called AI Lighthouse that will help companies develop and adopt their generative AI initiatives.

Datadog (DDOG  NASD)

Datadog develops monitoring and analytical solutions for dev, ops and businesses. Through its SaaS platform, it allows for automated infrastructure monitoring across the entire technology spectrum. This allows for monitoring, fixing issues, automation, among others. Typically this results in shorter time frames for trouble shooting items and improves time-to-market.
With DDOG's growth largely underpinned to the hyperscalers, particularly the mission critical IaaS/PaaS layers, a recovery in overall cloud spending is likely to translate quickly to spending on the Datadog platform as more workloads are migrated to the cloud.

Generative AI poses a strong tailwind for observability as the complexity of IT stacks evolve, compute infrastructure increases and the pace of application deployment speeds up. We believe that Datadog is a strategic infrastructure software provider with its end-to-end observability platform poised to benefit from IT departments shifting usage from multiple point solutions into an integrated suite.

Past Picks: September 7, 2022

Atlassian (TEAM NASD)

• Then: US$235.42
• Now: US$197.83
• Return: -16%
• Total Return: -16%

Mastercard (MA NYSE)

• Then: US$328.62
• Now: US$394.78
• Return: 20%
• Total Return: 21%

SAP SE (SAP NYSE)

• Then: US$85.57
• Now: US$137.92
• Return: 61%
• Total Return: 64%

Total Return Average: 23%