Please note: April Spreadsheet coming tomorrow! Please note: April Spreadsheet coming tomorrow!
Nobody knows how the pandemic will play out. Many of our readers have said on the forum that “finding the bottom” is not the goal, and we couldn’t agree more.
If you were to press me for an answer, my belief is that a recovery in Q3 is being very optimistic. I know that some banks and institutions have forecast this. In my perspective, the demand in tech is unknown – will buyers resume at previous levels? The employment situation in tech is certainly not immune either. A few more cracks appeared this week with a report of 4,000 layoffs in the startup sector. Startups are big consumers of cloud software, so it has a domino effect.
Our approach is to make educated decisions based on product knowledge/competitive positioning (my analysis) and probabilities (Knox’s technical analysis). We do not have strong bear or bull opinions. I personally get fatigued with the “buy buy buy my portfolio” analysts and the “world is ending” analysts. That’s part of why Knox is so instrumental. He presents the index numbers and the stock movements, uses a methodology to manage risk and remove emotions, and we go from there.
When looking at the month ahead, our company’s portfolio has this general plan:
- Buy at the high end of the targets for data center stocks: cloud at the infrastructure level and cloud at the platform level should do well. One of the reasons I focused on cloud for the premium site during the sell-off is that it’s insulated from trade wars and recessions. My article at the time said, “My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the crosshairs of anti-trust and are susceptible to consumer spending changes.”
On that note, I think a solid cloud coronavirus portfolio would include: Nvidia, AMD, Microsoft, Alibaba, Datadog, and Dynatrace. I plan to add Okta this month. I’m not a fan of Intel myself as their innovation lags, but I would listen to an argument here. You could make an argument for Amazon too, as the e-commerce, grocery and data center are all strong segments right now.
We covered LAM recently, which is more on the memory side. I’m looking for cash-cow havens that position well for a renewed trend and can also weather the year ahead. LAM has impressive levels of cash. There is some crossover with the data center but mainly powers mobile and electronics. That last part could be stalled but I’d like to get into the stock during this year’s respite from the semiconductor rally.
- Buy at the mid-low end of the targets for ad-tech: This may take through next quarter (Q2) to see the full effects. I’ll be listening closely on the earnings calls. This is Pinterest, Roku, The Trade Desk, Snap, Twitter, Google, Facebook, Rubicon/Telaria. Here is some follow up information in addition the premium blog post I wrote recently:
undefinedundefinedundefined
To recap, ad-tech companies could have a positive earnings surprise but it’s not probable they will get through the three long months of Q2 unscathed. Patience here is going to pay off. Usage going up well over double digits and revenue being flat to down is not something to get hasty with.
Disney is a great example of a big brand having to furlough workers. You can imagine what this did to Disney’s ad spend, and we know Roku was a favored ad platform for Disney. Basically, whatever we see for Q1, we can expect this impact to double or triple in Q2.
You’ll see some conviction downgrades across ad-tech for April.
- Buy at the mid-low end of the targets for consumer related stocks. Apple, of course, falls into the consumer category. On another note, Inseego was on CNBC this past week on seeing an increase in demand for hotspots. This boost could be a one-time event.
- Buy at the high end of the target for enterprise stocks with excellent cost-benefit ratios: Alteryx is very expensive, so it’ll be interesting to see if they can maintain the $4500 product cost as we (potentially) face more layoffs in tech.As stated, I plan to look closer at Okta as identity access management is likely doing well in the current environment. They’ve got the special sauce with the product, and in times of stress, companies will go with the brand name that works well rather than undercut with cheaper competitors. Identity management could go under the data center category, as well.
Cloud work-from-home: As you know, I like Slack. The market will likely question Slack bc the company is bottom heavy with it’s freemium model; meaning paid accounts aren’t offsetting the free accounts. “Will the product monetize?” — this is what financial institutions are unsure of. I am not as worried about this. It’s common to gain as much traction as possible and give up gains in the beginning stages. Monetizing is easier than building a product that works well and can scale.
Docusign should have some staying power too this year. Really great product for legal, real estate, and finance industries who are now working from home. These industries don’t typically work from home so a true growth opportunity and perhaps a change or reinforcement around documents for digital management. We will be covering Docusign soon and officially adding this company to our coverage and portfolio.
Regarding Zoom Video, don’t get confused about this company as the press starts to lump it into a Coronavirus fad. The company has a rare combination of strong financials and perfect product-market fit. I also covered the security issues on the forum – not concerned with this and actually quite common (and easily fixable).
Please subscribe to any chat rooms on the forum where you’d like more information. forum where you’d like more information.
Regarding Knox’s targets, he is holding fast on the ranges, and will update if he sees a need to raise them. Also, if the market is signaling a potential turn, and our stocks have not hit the respective targets, we will update you in a blog post.
Our goal is utilize this opportunity to setup great long-term positions. However, due to the uncertainty in the global economy, we will lean towards being cautious. What this translates to, is that we feel the 2300-2750 region in the S&P 500 carries too much risk. If a vaccine hits the market tomorrow, we will get back in with more confirmation of an upward trend. Please keep in mind, if we do re-enter a bull market, our projections of where that will take us will make up for being a little late. If we continue to see the ripple effects of closed businesses and (mind-blowing) unemployment, then we will look below 2300.
Thanks!
