Kim Bolton, president and portfolio manager of Black Swan Dexteritas

FOCUS: Technology stocks

MARKET OUTLOOK:

The equity markets are exiting what has historically been the weakest three-month period of the year and entering what has historically been the strongest three-month period of the year. In the three months following the close on Oct. 7, five sectors have experienced median gains of seven per cent or more since 1990, and four have posted positive returns at least 80 per cent of the time.

Back on July 14, we entered what has historically been the worst three-month period of the year where the S&P 500’s median performance, and consistency of positive returns, have been lower than at any other point throughout the year. Thankfully, the calendar is moving past the three-month window that follows July 14 and is actually entering what has historically been the strongest time of year for equities. In fact, the S&P 500’s median three-month performance from the close on Oct. 7 has seen a gain of 6.96 per cent, which was stronger than any other three-month window throughout the calendar year. In terms of positive returns, the next three months have also been among the most consistent of any three-month period throughout the year. Indeed, from the close on October 7, the S&P 500 experienced positive returns over the next three months 81 per cent of the time.

Like the S&P 500, most sectors have also experienced their strongest performance in the three months following early October. Of the 11 S&P 500 sectors, five have experienced median gains of seven per cent or more. Technology leads the way with a median gain of 9.5 per cent and positive returns 75 per cent of the time. Behind technology, industrials and materials have rallied over eight per cent. No sectors have had median declines during the upcoming three-month period. Of the five that haven’t rallied more than seven per cent, none have experienced gains of more than four per cent, so there still has been a relatively widespread between the haves and have-nots. In terms of consistency, the only sectors that have not had positive returns during the upcoming three-month period two-thirds of the time or more are energy, health care, and communications.

As we have repeatedly noted in the past, investing based on seasonal patterns is far from a foolproof strategy. We view it as one piece of the overall investment playbook. At the moment, positive seasonal trends may only provide a small amount of air to equities that are suffocating from a U.S. Federal Reserve that has shown no inclination to loosen its grip on the market’s neck.

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TOP PICKS:

Adobe (ADBE NASD)

• A one-stop shop for product design, content creation, marketing and web and mobile commerce.
• Its individual offerings have competition from companies like Apple, however Adobe’s competitive advantage comes from its 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 its multimedia offerings are still the most lucrative.
• On Sept. 14, 2022, Adobe agreed to buy collaboration-software company Figma for around $20 billion, using the biggest deal in its history to acquire a small-but-fast-growing rival that the tech giant hopes can give it access to a broader group of customers. Figma is also the leader in “generative design AI”; the next big thing!
• Thanks to the 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 it allows the building of 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.
• Adobe operates through three segments:
  • Its digital media segment provides tools and solutions that enable individuals, teams and enterprises to create, publish, promote and monetize digital content.
  • Digital experience segment offers products, services and solutions for creating, managing, executing, measuring, monetizing and optimizing customer experiences from analytics to commerce.
  • Publishing and advertising segment offers products and services, such as e-learning solutions, technical document publishing, web conferencing, document and forms platform, web application development, and high-end printing.

Salesforce (CRM NYSE) 

• Salesforce's service offerings include sales to store data, monitor leads and progress, forecast opportunities; gaining insights through analytics and relationship intelligence and deliver quotes, contracts and invoices.
• On Jan. 1, 2021, Slack and Salesforce announced an agreement for Salesforce to acquire the company for a value of approximately $27.7 billion. The acquisition closed on July 21, 2021.
• Its service offerings also comprise a flexible platform that enables companies of various sizes, locations and industries to build business apps to bring it closer to its customers. Its offerings drag-and-drop tools; an online learning platform that allows anyone to learn in-demand Salesforce skills; and Slack, a system of engagement.
• In addition, the company's service offerings include marketing offerings that enables companies to plan, personalize and optimize one-to-one customer marketing journeys. It also has commerce offerings, which empower brands to unify the customer experience across mobile, web, social, and store commerce points. Further, its service offerings comprise Tableau, an end-to-end analytics solution serving various enterprise use cases.
• We believe in the strong growth of the cloud SaaS space and Salesforce’s leadership in this space.
• There are risks to our thesis, which we will watch:

1. Problems along any step in the supply chain
2. New entrant pricing competition
3. Economic slowdown
4. Declining pro forma operating margins

Oracle (ORCL NYSE)

• Oracle Corp. engages in the provision of products and services that address all aspects of corporate information technology environments. It operates through the following business segments, cloud and license, hardware and services. The cloud and license segment markets, sells and delivers applications, platforms and infrastructure technologies. The hardware segment provides hardware products and hardware-related software products including Oracle Engineered Systems, servers, storage, industry-specific hardware, operating systems, virtualization, management and other hardware-related software and related hardware support. The services segment offers consulting, advanced support and education services.
• While the company has been in the news for Tik Tok, we think Oracle presents a robust long-term play.
• In addition to OCI becoming accepted by the industry, the company’s Cloud@Customer has shown promise to help accelerate overall growth.
• Cloud@Customer is also likely to help tide over Oracle’s legacy business growth pangs by offering the on-premise customers a chance to update its on-premise databases to Oracle’s autonomous database.
• The visible sales momentum across businesses gives us confidence that the company can deliver stellar returns over the next few quarters.
• After not making a meaningful acquisition for several years, Oracle announced its intention to acquire Cerner Corporation, a leading healthcare IT provider, for $28.3 billion, or $95/share, in an all-cash offer. As per the company, Oracle expects:
  • 1) the acquisition to close in CY ’22; (2) the transaction to be immediately accretive to non-GAAP EPS in the fiscal year in which it closes; and, (3) for Cerner to contribute to top-line and EPS growth in the years following the deal. Over the last 12 months, Cerner has generated $5.1bn in revenues with non-GAAP operating margins of 21 per cent. 
• Oracle generated $41 billion in revenue and has averaged a non-GAAP operating margin of 47 per cent over the last 12 months.
• Sales were $11.4 billion in the fiscal second-quarter, meeting analysts’ average estimate. Profit, excluding some items, was $1.03 a share. 
• Oracle said currency fluctuations reduced the earnings by eight cents a share. Analysts projected $1.06 a share.
• Cloud revenue, the highly watched segment that Oracle has been trying to expand, rose 45 per cent to $3.6 billion in the period ended Aug. 31, the Austin, Texas-based company said Monday in a statement. Growth was 19 per cent last quarter, before the Cerner deal closed.

PAST PICKS: October 20, 2021

Monday.com (MNDY NASD)

• Then: $367.63
• Now: $89.54
• Return: -76%
• Total Return: -76%

Taiwan Semiconductor (TSM NYSE)

• Then: $115.59
• Now: $65.26
• Return: -44%
• Total Return: -42%

Global-e Online (GLBE NASD)

• Then: $64.85
• Now: $22.93
• Return: -65%
• Total Return: -65%

Total Return Average: -61%