Kim Bolton, president and portfolio manager at Black Swan Dexteritas

FOCUS: Technology stocks

MARKET OUTLOOK:

Last month (i.e. July 2022) global stock markets had their best month since November 2020. Retreating global interest rates and a general stable read-through from second-quarter earnings reports regarding the current business environment appears to have stabilized equity sentiment. Clear signals of softening in recent economic readings, as well as high-profile corporate pre-announcements like that of Walmart, bolstered hope that much of the central banks’ heavy lifting in terms of tightening is starting to get the desired effects. This is potentially paving the way for a “softish” landing and potential U.S. Federal Reserve pivot into next year.

There may not be an official start date, but August represents what many consider the dog days of summer when, for a lot of people, the market is the last thing on their minds. With most institutional participants on the sidelines, it’s the technical traders that have the greatest influence on market direction in the month of August. Historically, there have been a number of calamitous events that began or transpired in August, but overall stock market returns during this time of year have been middling; the S&P 500’s median August gain has been 1.15 per cent. Nothing especially notable, but the way this year has gone, a gain is a gain!

Your Black Swan Dexteritas [BSD] portfolio management team is still very constructive on the stock market’s performance for the remainder of 2022. Your BSD team believes inflation’s impact on the stock market and this year’s interest rate increases have already been significantly priced in by investors. By the winter or spring of 2023, the developed world economies could experience a relief rally if investors start to convince themselves that the Fed may need to dial back its aggressiveness so as to prevent a deep recession. Remember, stock markets tend to look 6-12 months ahead (in terms of valuation), which means it acts as a forward indicator. So, today’s markets reflect the economic environment for the spring of 2023, which should be significantly more optimistic than today. The markets will need major participation from its largest sector – the technology sector – when this rebound starts to unfold.

We remain confident our portfolio management tools can generate annualized returns in excess of eight per cent for the BSD Fund, and achieve the performance expectations of our customized Separately Managed Account clients.

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TOP PICKS:

Amazon.com (AMZN NASD)

•  Amazon’s retail business is primed for continued growth. The company is the lead market participant and dominator of the e-commerce market. Physical store and omnichannel expansion will bolster long-term commerce growth.
•  AWS provides computing, storage, database, analytics, machine learning, and other services. It remains the backbone of the internet; it totals almost 70 per cent of the company’s EBIT today, and in conjunction with Microsoft, will own the cloud business for years to come.
• As growth begins to decelerate longer term, management should become increasingly focused on expanding e-commerce margins. Margin expansion will boost profitability and free cash flow long-term.
• In general, Amazon is a force to be reckoned with. As optimistic as this may sound, Amazon has nearly unlimited TAM potential. The company continues to aggressively disrupt other industries. This aggressive management style is a key reason why AMZN is in the top five position.
  • Amazon decided to conduct a 20-for-1 stock split (June 2022); first-ever stock split since 1999.
• With a successful two-day Prime Day event in July and management dismissing end demand concerns in its core businesses, we see Amazon well positioned to produce a strong revenue growth narrative in the second half of 2022.
• We continue to see Amazon positioned as a leader in all aspects of secular growth within internet coverage (e-commerce, digital advertising, media consumption, aggregated subscription offerings and cloud computing).

SentinelOne (S NYSE)

• SentinelOne Inc. operates as a cybersecurity provider in the United States and internationally.
• The company's Extended Detection and Response (XDR) data stack fuses together the data, access, control and integration planes of endpoint protection platform, endpoint detection and response, cloud workload protection platform, and IoT security into a centralized platform.
• Its Singularity XDR Platform delivers artificial intelligence-powered autonomous threat prevention, detection and response capabilities across an organization's endpoints; and cloud workloads, which enables seamless and automatic protection against a spectrum of cyber threats.
• Second quarter 2022 earnings:
  • SentinelOne delivered results well over consensus estimates, driven by a strong demand environment for mission-critical security and record customer adds. Revenue and annual recurring revenue (ARR) continued to grow triple digits year-over-year while gross and operating margins expanded 15 and 54 percentage points year-over-year, respectively.
  •  Better than expected second quarter performance, along with a record pipeline, enabled SentinelOne to raise third quarter and full-year organic revenue guidance above consensus expectations. Previous full-year guidance implied 80 per cent year-over-year growth at the midpoint. Updated fiscal year 2023 revenue guidance now implies organic growth in the mid-80 per cent range, above consensus expectations at 80 per cent year-over-year.

Walt Disney (DIS NYSE)

• Before COVID-19 Disney’s main competitive advantage was parks and merchandise which accounted for 60 per cent of consolidated operating income.
•  Last year Disney announced a new organizational structure to accelerate its direct-to-consumer streaming strategy.
  • Content monetization will fall under the newly created media and entertainment distribution segment.
  • Content creation will fall under three distinct segments including studios, general entertainment and sports.
  • This reorganization primarily impacts Disney's media and entertainment businesses, which include its media network segment (cable and broadcast networks), studio entertainment segment and direct-to-consumer and international segment.
  • There is no change to Disney's parks, experiences and products segment.
• Direct-to-consumer $4.26B v $2.71B year-over-year.
• Disney+ paid subscribers: 116.0M v 103.6M q/q v 113.0Me.
• ESPN+ paid subscribers: 14.9M v 8.5M year-over-year.
• Total HULU subscribers 42.8M v 35.5M year-over-year.
• This represents a 3.5x increase in Disney's DTC base over the prior 12 months, and ranks the company as the third largest provider of subscription streaming services following Netflix (193 million) and Amazon Prime (>150 million).
•  Disney’s innovative decision to become a major source of streaming will propel the company into the future.
•  Expect some volatility because of some investment risks:
  • Coronavirus on parks and cruises.
  • Box-office success will be hard to replicate.
  • News flow on streaming competition.
  • Disney will report second-quarter 2022 on Aug. 10, 2022

PAST PICKS: September 9, 2021

Block (SQ NYSE)

• Then: $251.54
• Now: $83.33
• Return: -67%
• Total Return: -67%

Twilio (TWLO NYSE)

• Then: $352.63
• Now: $95.62
• Return: -73%
• Total Return: -73%

Match Group (MTCH NASD)

• Then: $157.71
• Now: $59.76
• Return: -62%
• Total Return: -62%

Total Return Average: -67%