Shane Obata, portfolio manager, Middlefield Capital

FOCUS: Global large cap equities

MARKET OUTLOOK:

April was the worst month for equity markets since 2020, with MSCI World, the S&P 500 and the Nasdaq Composite returning -8.3 per cent, -8.7 per cent and -13.2 per cent, respectively. It has been an especially tumultuous year for growth stocks with the Nasdaq Composite down more than 20 per cent year-to-date. Relative to their highs, as at April 30th, more than 45 per cent of Nasdaq constituents are down 50 per cent, more than 22 per cent are down 75 per cent and more than five per cent are down 90 per cent.

Investors are facing a myriad of macro risks including tightening monetary policy, ongoing supply chain concerns, the war in Ukraine and lockdowns in China. As a result, sentiment has deteriorated to extremely low levels, with the AAII bull-bear survey metric recording its lowest reading since March of 2009. While we remain cognizant of these headwinds, we believe they are being reflected in current share prices and the risk/reward setup is becoming increasingly attractive for the second half of the year. The inflation narrative is ultimately the most important factor for stocks right now and we are optimistic it will improve in the coming months. Inflation started increasing in March last year, initially driven by base effects. As we start to lap last year’s higher inflation readings, these effects should begin to work in reverse. U.S. CPI data for April will be reported on May 11th and will receive lots of attention given a downward inflection could act as a material catalyst for equites.

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TOP PICKS:

Advanced Micro Devices (AMD NASD)

• Purchased at US$89.82 on 28-Apr-22

Advanced Micro Devices (AMD) remains one of our top picks in the semiconductors industry. The company is a leader in CPU technology and continues to gain share from Intel in client and, more importantly, server. We expect AMD to become more resilient over time as it benefits from a structural increase in semiconductor demand due to 1) megatrends such as high-performance computing and 2) silicon content growth in industries such as autos. AMD has become increasingly diversified and is no longer fully exposed to PC/gaming, which we continue to like but view as more cyclical than data center. The latter falls into the enterprise, embedded and semi-custom segment, which had grown to ~43 per cent of revenues in Q1’22, up from 20 percent in Q1’20. Following the recent market drawdown, AMD is now trading at extremely attractive levels given its tremendous history of execution and future growth potential.

Blackstone (BX NYSE)

• Purchased at US$107.78 on 27-Apr-22

Blackstone (BX) is our preferred way to access high quality, GARP exposure to the alternatives space. The company was formed in private equity is now diversified across various business lines such as real estate, which is now its largest segment in terms of AUM. We do not expect macro volatility to derail the rapid pace of BX’s asset gathering efforts and believe that, even with rising rates, allocators will continue to favor alternatives versus fixed income. The risk / reward proposition for BX is very persuasive, with the company recently trading at a PEG ratio of 1x versus the S&P 500 at 2.5x. We view this as especially compelling given the company’s high quality and consistent earnings profile, which carries significant upside through various avenues such as increased retail penetration.

Amazon (AMZN NASD)

• Purchased at US$2,543.01 on 29-Apr-29

We continue to view Amazon (AMZN) as the best logistics company in the world, despite the recent (much) worse-than-expected quarter. In response to the pandemic-led boom in online sales, AMZN dramatically increased the scale of its operations. With the world normalizing, the company has been left with excess capacity. This combined with inflation-driven cost increases are having a negative impact on short-term profitability. While we acknowledge the current headwinds, we continue to believe in the long-term growth potential of e-commerce, which should continue to benefit from consumers becoming increasingly comfortable transacting in areas that currently are predominantly “offline” such as groceries, home improvement and beauty. At current prices, the market is ascribing virtually all of the company’s valuation to Amazon Web Services. In other words, we are getting the blossoming advertising business as well as the premier retail business for next to nothing.

Netflix (NFLX NASD)

• Then: $499.24
• Now: $180.68
• Return: -64%
• Total Return: -64%

Deere & Co (DE NYSE)

• Then: $356.71
• Now: $375.40
• Return: 5%
• Total Return: 6%

Taiwan Semiconductor (TSM NYSE)

• Then: $118.95
• Now: $90.48
• Return: -24%
• Total Return: -22%

Total Return Average: -27%