Kim Bolton, president and portfolio manager, Black Swan Dexteritas

FOCUS: Technology stocks 

MARKET OUTLOOK:

For June, the S&P 500 and Nasdaq Composite both added about 6.5 per cent, and the Dow Jones Industrial Average’s 4.6 per cent gain was the best showing since last November. For the second quarter, the S&P 500's 8.3 per cent jump was its best quarter since the fourth quarter of 2021, while the Nasdaq surged nearly 13 per cent and the Dow Jones added 3.4 per cent.

Finally, for the first six months of 2023, the Nasdaq exploded 31.7 per cent higher for its best first half since 1983, and the S&P 500 soared 15.9 per cent for its best first half since 2019, while the Dow Jones added a more modest 3.8 per cent.

The catalysts for these year-to-date outsized returns are many. Near the top of the list are slowing inflation, the U.S. Federal Reserve’s liquidity response to the spring 2023 regional banking crisis and the generative AI craze. The latest update on inflation in the U.S. will drop on the lap of investors, with the June consumer price index (CPI) report scheduled to be released this Wednesday. Economists forecast headline inflation to fall to three per cent from four per cent in May and core inflation to be reported at five per cent from 5.3 per cent in May.

A CPI surprise could reset expectations on the direction of the Fed. Traders are pricing in a 90 per cent probability that the Fed will raise rates by 25 basis points at the meeting later in July. Yes, CPI for June is expected to rise by just 3.1 per cent year-over-year when it is reported on Wednesday, but based on several factors, that could be the low print for the rest of the year.

Monthly CPI for the past two years illustrates the inflation surge from October 2021 to June 2022, and then the slower, but stickier, inflation trend since last summer. The average monthly increase in CPI has been 0.3 per cent since last summer, equating to a 3.6 per cent annualized rate. For the Fed to achieve its two per cent inflation goal, there will have to be a least two more rate hikes; and heaven forbid should inflation start to creep up.

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 their 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

Marvell Technology (MRVL NASD)

Marvell together with its subsidiaries, provides data infrastructure semiconductor solutions and spans the data center core to the network edge. The company develops and scales complex system-on-a-chip architectures, integrating analog, mixed-signal, and digital signal processing functionality. It offers a portfolio of Ethernet solutions, including controllers, network adapters, physical transceivers, and switches; single or multiple core processors; custom application-specific integrated circuits; and system-on-a-chip solutions.

The company also provides electro-optical products, including pulse amplitude modulations, coherent digital signal processors, laser drivers, trans-impedance amplifiers, silicon photonics, and data center interconnect solutions;

It is optimizing headcount and further streamlining operations.

It can greatly benefit from the AI trend in several ways due to being a leader in designing, developing and supplying integrated circuits for high-speed data communication, telecommunications and data storage.  

• Data center infrastructure: The rise of AI has led to a surge in data generation and processing, requiring robust data center infrastructures. Marvell, with its proficiency in networking and storage solutions, can provide hardware solutions optimized for AI workflows, including high-speed data transfer and storage solutions.
• Edge computing: With AI pushing towards the edge (closer to the source of data), there is an increasing demand for low-power, high-performance chips that can perform AI tasks efficiently at the edge. Marvell can focus on creating such chips and associated hardware, providing efficient AI processing in devices such as autonomous vehicles, IoT devices, and more.

Microsoft (MSFT NASD)

Microsoft agreed to buy Activision Blizzard in an all-cash deal valued at nearly $70 billion, its largest acquisition by far. The deal will sharply expand Microsoft’s already sizable videogame operation, adding popular game franchises including Call of Duty, World of Warcraft, Diablo and Candy Crush to Microsoft’s Xbox console business. Microsoft said the transaction would make it the world’s third-largest gaming company by revenue, behind China’s Tencent and Japan’s Sony Group.

Microsoft continues to demonstrate the uniqueness of its enterprise IT reach and positioning with its Azure and Server and tools footprints. We see the benefits from Microsoft’s bring your own license program (Azure hybrid benefits) as being a solid driver of enterprise agreement renewals and Azure adoption with partners noting continued strong net expansion trends with our view that this momentum will continue to build throughout the full year and beyond.

The productivity and business processes segment offers Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and more.

Intelligent cloud segment licenses provide a collaboration platform and code hosting service for developers; and Azure, a cloud platform.

Microsoft announced a new multiyear, multibillion-dollar investment with the artificial intelligence lab OpenAI. The investment is the third phase of the partnership, following Microsoft’s previous investments in 2019 and 2021. Microsoft said the renewed partnership will accelerate breakthroughs in AI and help both companies commercialize advanced technologies.

Meta Platforms (META NASD)

In its first quarter 2022 earnings report and forward commentary, Meta took the opportunity to lay out a better (than feared) short-term revenue growth guide. It also outlined how new product innovations will position Meta for the long-term while balancing a lower opex guidance to align revenue trajectory with margin dynamics given the volatile landscape with continued shareholder returns.

Debates will persist over product transitions and industry platform headwinds in the quarters and years ahead. We remain focused on Meta’s large-scaled audience across a family of apps that the company can continue to align on evolving consumption habits in short-form video, messaging, commerce, augmented reality and social connections.

While the transition of advertising revenues against broader privacy changes remains volatile and difficult to predict, we see platform and infrastructure investments by Meta as continuing to build independence from a volatile range of outcomes from future mobile OS platform changes.

PAST PICKS: August 3, 2022

Amazon.com (AMZN NASD)

• Then: US$139.52
• Now: US$128.86
• Return: -8%
• Total Return: -8%

SentinelOne (S NYSE)

• Then: US$27.10
• Now: US$14.78
• Return: -45%
• Total Return: -45%

Walt Disney (DIS NYSE)

• Then: US$109.02
• Now: US$88.86
• Return: -18%
• Total Return: -18%

Total Return Average: -24%