The State Of Tech - Marketplace Midyear Roundtable

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By SA Marketplace :

by Daniel Shvartsman

The first half of 2019 saw a lot of green in the markets, as broader indices recovered from the brief bear market in the second half of 2018 and returned to new heights. Despite that, the wall of worry continued to grow, even if the specific concerns changed. Instead of a rising rate environment, expectations have shifted to a possible rate cut even with good job numbers. Geopolitical flashpoints have (re-)emerged in Venezuela, Iran, and in the ongoing China-US trade conflict. European economic growth appears to be slowing, and nobody's quite sure where we are in the US cycle. Oh, and another presidential election cycle is beginning.

So what to make of this all? We decided to take the temperature of the markets with a midyear Marketplace Roundtable. We asked our Seeking Alpha Marketplace contributors - authors who run investing services and provide ideas and guidance to members about how to think about the markets or at least certain parts of it - to share their views on the current climate and how they're positioning as a result.

Over 55 authors participated in our survey. We've grouped their responses into several categories, ranging from tech to commodities, biotech to dividends and income investing. We're going to share their responses in those grouped categories over the coming week or so. Each discussion will have two common questions about the market as a whole, two sector-specific questions, and a round of current favorite ideas. We hope you enjoy the discussion, and welcome you to join with comments on these issues or on any key points that didn't come up, or follow-up questions.

We start with tech. The story in tech for so long has been about FAANG in whatever permutation. But 2019 has also seen a crest in IPOs and a resurgence in bitcoin steal headlines. Where does that leave us? Here's today's panel to discuss:

Please check the end of article for disclosures - authors disclosed positions based on stocks they respectively discussed.

Coming into 2019, markets had a degree of doubt about the trade war, the direction of the Fed, and our place in the economic cycle. That doubt seemed priced in. We're around all-time highs now, 25% up from lows - is the market doubt resolved?

Cestrian Capital Research : No. The market is caught between fundamentals (slowing) and external factors (2020 election, Fed/White House tension, China). We anticipate an upward drift towards the 2020 election, tempered by fundamentals.

Jeffrey Himelson : I believe the driving force behind the resurgence in the stock market has been the consensus that the Fed will not only stop raising rates in 2019, but will also be cutting rates. By cutting rates, the Fed will be throwing some more lighter fluid on the fire that is the economy. Sorry for throwing in two analogies, but the market is like a junkie and the Fed is giving the market another fix of stimulus with a rate cut. Eventually the market will face a correction, but with a bit more stimulus coming from the Fed, the market will be churning a long a bit longer.

Ranjit Thomas : No. I think the market has come around to the realization that the President is conscious about the markets, and if they decline, he will reverse the policies that caused this. The Fed seems to have buckled under pressure. The economic cycle has room to run further if the economy is allowed to function freely. If anything, there are excesses that continue to build up in the valuation of profitless growth companies, not to mention concepts like Bitcoin.

App Economy Insights : Rather than trying to predict macro movements, I focus on company research and keep adding to existing or new positions diligently, no matter where we are in the business cycle. Markets draw-downs can happen with no apparent reason and I save a lot of time not thinking about this kind of questions.

Bull & Bear Trading : This is an excellent question. Perhaps "market doubt" never gets completely resolved, but instead morphs to adjust for the progression of real-world developments in real-time. This is one of the dynamics that make markets so interesting to follow and provides us with trading opportunities. U.S. markets may have adopted a collective perception that the Trump administration's efforts in the so-called trade war will achieve greater economic parity for our nation's economic interests versus our global trading rivals. There is a growing sense of confidence that Trump and his team are acting competently on behalf of American economic interests both domestically and abroad. This is a welcome improvement from past administrations in Washington.

General Expert : It's hard to say what the market was exactly thinking; but if the narrative for the Q4 2018 pullback was that the Fed was going to stubbornly raise rates rapidly despite international uncertainties, then I can definitively say that such fear no longer exists.

Paulo Santos : It would actually seem the market has been rallying through the trade war and a slowdown in the economic cycle while carrying expensive valuations. Neither of these things were resolved -- the latest celebration on the trade war referred only to negotiations with China restarting.

What in your sector has changed in the first half of 2019, or what has your attention as you're researching positions?

Cestrian Capital Research : We focus on the space sector which is experiencing solid growth. The key drivers are militarization (= government spend) and cost reduction (= commercial spend). So far the sector is less volatile than say Big Tech; no change to our approach this year vs the last two years.

Elazar Advisors : Tech fundamentals in general have deteriorated but optimism has not waned. Still regardless of deteriorating fundamentals we're still doing the bottoms-up work because there are companies out there with upside earnings momentum.

Jeffrey Himelson : One sector that has faced a massive rebound in the first half has been tech stocks, i.e. FANG, Facebook, Amazon, Netflix and Google. My main concern with these names is the risk of regulations up-ending their business models. I believe anti-trust enforcement and new privacy regulations are coming and these stocks are most vulnerable. I am currently looking at smaller-cap value opportunities.

App Economy Insights : I focus on the disruptors of the App Economy and beyond. If you look at SaaS businesses for example, investors are starting to clearly separate the wheat from the chaff. Under-performing businesses are being punished hard and fast, while those that keep on beating and raising numbers are valued with very high multiples. Investors have to look for quality, companies that they would be happy to hold strong should a downturn occur.

Bull & Bear Trading : Bitcoin (BTC-USD) has experienced 5 major crashes in its brief history and has recovered to make new highs after the first 4 crashes. Trader's Idea Flow believes that Bitcoin is now in the process of marching to a 5th new high that may result in a blow-off, top rally that will surprise even most Bitcoin bulls. Increased potential demand in the form of a doubling of blockchain wallets that can be used to purchase Bitcoin, and a doubling of blockchain global growth measured in megabytes has taken place since the last all-time high for Bitcoin in December 2017. Also, institutional acceptance of Bitcoin as part of a recognized cryptocurrency asset class has resulted in strong institutional buying globally in this current rally. Juxtapose this demand side of the equation for Bitcoin with the meager growth in supply of Bitcoin since the December 2017 ATH for Bitcoin. In fact, we are approaching the top-end of the limited supply of the Bitcoin cryptocurrency when the nearly 20% acknowledged "forever loss" of 3.5 million Bitcoins is factored in. We are calling for new highs above $20,000 in Bitcoin by year end 2019 with a peak trade in this cryptocurrency above $50,000 in 2020.

General Expert : I personally don't pay too much attention to sector allocation. All else equal, one would want to find great ideas across all industries, but given my time constraint and the lack of good ideas, sector allocation comes after security selection. The Core Value Portfolio did take a meaningful position in a real estate company, not because it is a real estate company, but because I believe that it's a good company capable of generating superior returns in the future.

Paulo Santos : Effects which already came from 2018 became much more pronounced in 2019. That is, the US market's valuation gulf to other markets has increased further still. The gulf between growth and value has also increased further still. This has led to something rather rare -- we have a reasonably high net long exposure in spite of the US market being at valuations and in a point in the economic which would usually argue against it.

How are you positioning for the back half of the year and into 2020, and why?

Cestrian Capital Research : We assume a generally supportive market backdrop in the runup to the 2020 election, which gives us confidence in our Buys over and above the individual company attributes.

Elazar Advisors, LLC : Frankly, I have 12 month targets for stocks but shorter term I just want to respect the market if it's moving up or down. I can try to predict but I prefer to be long when it's going up or net short when it's going down. Respecting markets has been one driver to our performance.

Jeffrey Himelson : With the yield curve inverting three months ago, I believe we are due for a recession in the next 18 months. The bull rally may be extended through some rate cuts, but if trade negotiations break down, the Fed may not have enough ammunition to avert a recession. I am positioning my portfolio into value opportunities that will not suffer much in the face of a recession.

Ranjit Thomas : Continue to hold positions in well-run companies that compound earnings over time and return cash to shareholders.

App Economy Insights : My portfolio has very little rotation with most positions held for five years or more. My buying strategy has been focused on quality businesses that have temporary weakness in their price. I'm also happy to have added to some Chinese internet companies that have been beaten down over the past year. I also continue building positions in best-of-breed entreprise software companies and genomics, both industries that are recession-proof.

Bull & Bear Trading : As a short-term trader, Trader's Idea Flow occasionally holds winning positions for what extends into a longer-term holding. For example, we sold Snap ( SNAP ) short on day 3 after the IPO at $27.78 on March 6, 2017 as posted for our Trader's Idea Flow subscribers. We covered this winning short at $5.64 as published in our January 17, 2019 post for our Trader's Idea Flow community. Importantly, in this same post that we announced our short cover, we also stated that we had become long Snap with a position at $5.64. We called for an upside forecast for both short and long-term traders. Nearly 6 months later Snap now trades at about $15.20 up about 190% from our short cover and call for a long position. In Trader's Idea Flow we address the bull thesis for why we believe Snap will trade to new all-time highs in the next 12 months. Our published, documented trading record on Snap shares is now a consecutive 6-for-6 successful trading calls with the most recent call being up about 190% in the last six months.

We remain long Snap shares as the company's turnaround continues and may gain momentum while Facebook now is pre-occupied with anti-trust concerns from international regulators. It seems that the rabid determination of Facebook to destroy Snap now may have relented in the realization that regulators may not appreciate the optics of Mark Zuckerberg and company attempting to crush competitors in their marketplace. This breathing room may provide Snap with great opportunity for the next year at least. We see Snap shares trading above $30 in the next 12 months as continued upside momentum prevails.

General Expert : I try not go get ahead of myself when looking at macros. Obviously 2020 is the big year politically, but none of my investments are contingent on any particular party winning; furthermore, I have no strong opinion of who will win, or do I have any confidence in predicting how markets will react even if I did know the result. Given the above, I will not position the second half of 2019 differently.

Paulo Santos : We have a high net long exposure because in the midst of an expensive market, there's a large number of high-quality foreign companies that trade at incredibly depressed valuations even though their prospects are normal, not poor. The companies' valuations and prospects are what's driving our positioning -- not an opinion on the US market, which seems both stretched, speculative and overvalued.

Tech - The 2010s unicorn wave appears to have finally reached Wall St. in full. What interests you about the recent series of IPOs, or what is the broader impact on the tech sector?

Cestrian Capital Research : A number of the tech IPOs in 2018 and 2019 have been excellent companies. The unicorns get the attention but there are many smaller stocks that are truly great businesses and we think have big long-term potential. We would point to Zscaler ( ZS ) as an example. It closed its first trading day in March 2018 at $34 and currently sits at $76 - market cap about $9.6bn. The company is profitable and cash generative and also offers the potential to be acquired. There are many other examples of this type of IPO. We think there is good hunting to be had in these below-the-radar stocks which launch at a market cap of sub $4-5bn.

Elazar Advisors : I remember the end of the 90s. Lots of loss making business models went to zero. I think this series has more funding to back them even with losses. That said, I'm earnings focused so i f earnings are not there I don't have the valuation support.

Jeffrey Himelson : I believe there is a dichotomy of recent IPOs: the companies that are coming public all pretty much have good business models, which is a distinction between the IPO market in the early 2000s. However, there are a few names, such as Beyond Meat ( BYND ) that are trading at levels that are clearly not justified by their business fundamentals. I believe BYND is trading at a very lofty valuation as a result of a small float and the realization from the market that the food industry is facing a huge secular shift that BYND is set to capitalize on. However, investors are not considering the risk and competition involved. It's great to invest in companies that will reap the benefits of huge market shifts, but you need to conduct a bottom-up analysis as well to ensure a company will be a good investment in the long-term. When the share lock-up period expires in a few months, I expect BYND to crash.

Ranjit Thomas : Let's face it, almost all these companies are overvalued, with hardly any earnings to speak of. The hope is that one of the larger companies will buy them one day. I think many of them will make for good short candidates once their market cap exceeds $20 billion (making an acquisition less likely) or when the next recession nears.

App Economy Insights : I try to shy away from new hot IPOs until I can listen to a few earnings call and see the price settle. I want get a good sense of management style and the path forward for the business. It's usually smart to wait for a few quarters before starting a position, particularly the end of a lock-up period.

My focus remains on the disruptors of our time. Among recent IPOs, I invested in Guardant Health ( GH ) that has delivered outstanding returns so far. There is still a lot more unicorns to come with companies like Palantir, Stripe, Robinhood, Sofi, and Airbnb still private.

Bull & Bear Trading : Failing business models such as Lyft and Uber coming to market with great fanfare is reminiscent of the late 1990's dot com tech boom that painfully transitioned into the dot com bust. For those of us who were trading those markets, some of us may be having flashbacks that raise cautionary concerns. I was a stockbroker with NYSE-member Oppenheimer & Co. in the late '80s and early '90s. I acquired Series 24 General Securities Principal licensing to manage other brokers and established my own research boutique in the early to mid '90s. In about '95 I launched my own hedge fund with a modest amount of assets under management. The inflection point at the top of that dot com market was not announced on CNBC for investors to take defensive actions. Market tops are rarely announced. However, the dot com market top was preceded by a number of questionable IPOs with perhaps Pets.com being the poster-child for most outlandish IPO audacity.

Today's wave of unicorn IPO's, such as Uber, dwarf yesterday's dot com lower quality IPOs in size. The sheer size of an Uber IPO who has not demonstrated a pathway to profitability is a concern. Perhaps, the Uber and Lyft business models have room for price increases to be implemented. Maybe cost-efficiencies can be learned for these companies. Until then, such IPOs are reason for concern and for keeping one cautious eye on the market exits. Exiting too early can be as bad as exiting too late. Remaining vigilant and aware of not just the reported market news , but the underlying market events that do not ge t report ed is the job of any valuable investor subscription service. Trader's Idea Flow brings over 30 years of market experience to this discussion.

General Expert : Everyone wants to be the next Amazon, but no one talks about the fact that Amazon was operating cash flow positive in the early 2000s and the company also had a huge profit center that will become a behemoth (AWS).

Both Uber and Lyft are fueled by VC money and are trying desperately to find an AWS. Both are so delusional that their management is spinning autonomous driving as the endgame, something that is completely out of both company's expertise. The solution to slowing growth seems to be finding more opportunities to create losses, which brings in more revenue. The eagerness of both company to jump on the scooter hype illustrates this exact point. When such experiments have failed in China en masse, with survivors being gobbled up by even bigger money losing entities (e.g. Meituan and Mobike), trying to replicate the same experiment in the less population dense West is just insanity to me.

Thanks SoftBank ( SFTBY ).

Paulo Santos : In my view the market is going through a tech bubble that's very similar to the dotcom bubble. If we consider tech (especially cloud stocks) + crypto (already crashed somewhat) + cannabis (already crashed somewhat), the current euphoria crop isn't much different from what was seen back in late 1999/early 2000.

The IPOs represent supply, and this kind of bubble usually breaks due to exhaustion also brought about by significant supply. That said, some companies will likely become high margin players. Although I am not long, I believe Uber ( UBER ) -- due to the nature of its business - is one.

What is one of your current favorite ideas, and what's the quick thesis?

Cestrian Capital Research : Northrop Grumman ( NOC ). We have been at Buy on this stock since February 2019 and it has rewarded us by coming very close to our 3-yr price target already - plus which it hiked its dividend by 10% last quarter. Our ongoing thesis for the stock is that NOC will at least hold share in its core defense and military space markets, gain share in commercial space thanks to its 2018 acquisition of Orbital ATK ( OA ), and improve operating margins a little under the new CEO.

Elazar Advisors : I've fallen in love with Amazon ( AMZN ) all over again. Last quarter was amazing. AWS and North America margins point to big EPS upside. I think in a world of slowing economies, Amazon is it's own global economy. With lower prices and convenience, Amazon's taking share from other "global economies."

Jeffrey Himelson : My readers know all too well that Fitbit ( FIT ) is my favorite stock right now. A few years ago, I invested in Chegg ( CHGG ) which was undergoing a pivot in its business model from one-time book sales towards recurring revenue software revenue. CHGG remained incredibly undervalued at that time. I believe FIT is currently in this transitory phase from episodic hardware sales (i.e. trackers and smart watches) towards creating a platform to generate higher-margin recurring revenue streams.

Ranjit Thomas : Selling options on Beyond Meat ( BYND ) to make use of the high implied volatility. This is a cult stock with a low float before the IPO lock up ends. The product is no healthier than the alternative, is worse for the environment since it costs more to make, and has an inferior taste (subjective), which in a weird way provides a competitive advantage since it is hard for a competitive offering to beat it by being functionally better.

App Economy Insights : My current favorite idea is Huya ( HUYA ), a video-game-content-streaming company with popular platforms in China, South East Asia and Latam. Huya is one of the fastest growing companies in China, more than doubling its revenue in 2018. It's also a pure play in the e-Sports segment. The company is still small (EV of $5 billion) given its addressable market.

Bull & Bear Trading : The romance phase of story stock Tesla ( TSLA ) is over. Valuation is now becoming increasingly relevant for investors as EV competition rises in the auto industry. Actual revenues and EPS will continue to become more important to Tesla investors. Imagine the concept of money actually being important for the valuation of Tesla on Wall Street. Wow, will miraculous wonders never cease? Tesla's days of trading into the stratosphere on disingenuous hype are ending, if not already over. Tesla's most recent smoke and mirrors trick states that, "... we are entering Q3 with an increase in our order backlog." While technically true, the fact is that Tesla's website allows potential customers to "order" the Model Y and Tesla China is also accepting pre-orders. Neither of those vehicles are currently even close to being in production. In fact, it will take billions of dollars in capital expenditures that are not provided for currently and years of time to build the factories that will build these vehicles. Perhaps the disingenuous hype of Mr. Musk is not completely dead yet but investors have become cynical. Shares of Tesla no longer are so easily managed higher by this overly-promotional CEO.

General Expert : I like Newmark Group ( NMRK ). The company is a partial IPO/spinoff from BGC Partners. The stock cratered soon after the separation. The company's highly complex income statement probably scared off investors who didn't understand them, even analysts were confused. However, it was clear to me that the management understands how the business works as they focus on cash flow generation. The stock didn't screen well due to its complexity. It was so bad that S&P gave the company BB+ even though it had a huge stream of earnouts that effectively made it debt free.Some post-separation clauses also prevented the company from repurchasing a significant amount of shares, which were trading at mid-single digits cash flow. The stock has rebounded somewhat along with the market, however, I believe that there remains significant upside.

Paulo Santos : My favorite idea right now is Mobile Telesystems ( MBT ). Its core mobile business is growing due to increased data demand. By H2 2019 it laps the removal of roaming fees in Russia. MBT is also investing in cloud growth businesses, and at the same time it carries a sustainable 9.8% gross dividend yield, while carrying an absurdly low valuation when compared to companies with much poorer prospects in developed markets.


Thanks to our panel for participating! As a reminder, you can check out their profiles and services at these links:

Watch out for the next edition of the midyear Roundtable tomorrow. We will be publishing on small caps and commodities to round out this week. If you have any thoughts on the tech discussion above, please chime in below!

See also Aaron's: Doing Well And Positioned For Continued Growth on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
Referenced Symbols: XLK , IPO , IPOS , FIT , HUYA

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