Kim Bolton, president and portfolio manager of Black Swan Dexteritas

FOCUS: Technology stocks

MARKET OUTLOOK:

There has been no shortage of market volatility in 2022. The 200-day moving average is typically considered a major trendline for the S&P 500, with breaks above considered bullish while moves below suggest a bearish outlook. If that’s the case, what are we to make of the fact that the S&P 500 has crossed above its 200-DMA more than five times this year and crossed below it six times?

You can’t really fault investors for the indecision with the uncertainty out there concerning the economy and the geo-political situation, but the impact of the U.S. Federal Reserve on the markets right now ranks just as high. Everyone knows that the Fed is going to hike rates considerably in the next several months, the only question is by how much. All of these uncertainties create a state of limbo whereby we are starting to see business decisions get put on hold. Your BSD team has managed to outperform the broad market equity indices by adopting a ‘sell the rallies’ strategy.

We have been very defensive in both the BSD Fund and our separately managed accounts. What I mean by defensive is the long stock portfolios are neutralized by short equity indice positions; the unrealized losses in the stock portfolios are offset by unrealized gains on the short equity indice positions. The upside in the stock portfolios is increasing, and when the geopolitical and inflationary uncertainties ease together with economic growth confidence, then it will be time to book the unrealized gains on the short equity indice positions and let the stock portfolio appreciate.

In this environment, we have positioned the BSD Global Tech Hedge Fund with the expectation of more market volatility. The fund is 82 per cent invested across a couple dozen tech vendors and tech end-users, with a 94 per cent short equity indices hedge on the invested stock portfolio, which will incrementally grow (with a ‘laddered’ Nasdaq put option position) if the market deteriorates further.

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TOP PICKS:

Microsoft Corp (MSFT NASD)

• Price target - $364.82
• 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 Holdings 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 FY20 and beyond.
• Productivity and Business Processes segment offers Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, as well as related Client Access Licenses (CAL); Skype, Outlook.com, OneDrive, and LinkedIn; and Dynamics 365, a set of cloud-based and on-premises business solutions for organizations and enterprise divisions.
• Intelligent Cloud segment licenses SQL, Windows Servers, Visual Studio, System Center, and related CALs; GitHub that provides a collaboration platform and code hosting service for developers; and Azure, a cloud platform.
• Commercial cloud, which is a superset of Azure, including commercial Office 365, LinkedIn and Dynamics accelerated by 200 basis points sequentially to 31 per cent y/y cc growth reaching nearly $80bn run rate
• Buy one-third of a position here at ~ $280.07 add at ~ $266.07 and ~ $252.06

Adobe Inc. (ADBE NASD)

• Price target - $650.00
• A one-stop shop for product design, content creation, marketing and web/mobile commerce.
• Its individual offerings have competition from companies like Apple, however Adobe’s competitive advantage comes from their full service suite “Adobe Creative Cloud” which includes all of Adobe’s creative apps plus extra services. Creative cloud has been downloaded over 449 million times, has 25 million active users, and 90 per cent of the world’s creative professionals use Photoshop.
• It has branched out into other service offerings such as marketing, analytics, and CRM, but their multimedia offerings are still the most lucrative
• Thanks to Magento purchase back in 2018, Adobe is a key e-commerce SaaS vendor. Magento’s new partnership with Amazon is helping Adobe to compete against Shopify and the growing $2.84 trillion retail e-commerce industry.
• Magento is now named Adobe Commerce, and allows it to build multi-channel commerce experiences for B2B and B2C customers on a single platform.
• In the 2021 Gartner Magic Quadrant for Digital Commerce, Adobe was named a leader among 17 vendors.
• Buy one-third of a position here at ~ $425.72 add at ~ $404.43 and ~ $383.15

Qualcomm Inc. (QCOM NASD)

• Price target - $214.03
• Qualcomm creates intellectual property, semiconductors, software, and services related to wireless technology – CPUs and GPUs. The company is a ‘fabless’ chipmaker, outsourcing the actual manufacturing of the silicon to foundries.
• Qualcomm’s leadership in 5G will not only mean strong share gains with original equipment manufacturers but also bring stronger pricing than with 4G products.
• Qualcomm’s recent acquisition of Nuvia is a huge move to scale up dramatically. It can reinvigorate current lines in smartphone, Windows PC and automotive ‘system on a chip’, and make them more competitive with the competition.
• The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI).
• Buy one-third of a position here at ~ $139.51 add at ~ $132.53 and ~ $125.56

PAST PICKS: May 6, 2021

VMWare Inc. (VMW NYSE)

• Then: $162.33
• Now: $108.71
• Return: -33%
• Total Return: -16%

Salesforce Inc. (CRM NYSE)

• Then: $218.05
• Now: $186.10
• Return: -15%
• Total Return: -15%

Palo Alto Networks Inc. (PANW NASD)

• Then: $337.44
• Now: $611.90
• Return: 81%
• Total Return: 81%

Total Return Average: 17%