MARKET OUTLOOK:
The inverse relationship between yields and technology stocks is approaching extreme levels, as rising rates are weighing on tech valuations more than usual. Although this poses a risk to stock multiples, we expect the economy to avoid the long-awaited consumer recession, which would be bullish for the long duration tech sector. We continue to believe that rates are at or near a peak for the current cycle. With that backdrop in mind, we think tech can continue to perform well in the second half of 2023 and into 2024. This is especially true if we are right about a reacceleration in cloud services growth and a recovery in the PC market in second half 2023.
With respect to momentum, the Nasdaq 100 recently exhibited extremely overbought conditions, as measured by its spread relative to its 200-day moving average. These conditions have only occurred seven other times since the index’s inception in the mid-1980s. While the signal was typically followed by negative short-term performance, the longer-term results have been overwhelmingly positive. According to Bespoke, the Nasdaq 100 was higher every time over the following 12 months of reaching these levels, with an average gain of nearly 27 per cent. We are sharing this study not to advocate for short-term market timing, but rather to illustrate that extreme overbought conditions often occur in the context of a broader bull market.
Tech earnings have been in an extended bear market for multiple quarters. Going forward, earnings growth within the tech sector is expected to be much higher than the broader market. If our base case is correct, and tech earnings are starting to turn the corner, then a secular bull market in tech is likely in its early stages.
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TOP PICKS:
Nvidia (NVDA NASD)
Last purchased at US$446.79 on July 24, 2023
Nvidia is the first and foremost beneficiary of the AI spending cycle. We recently heard that NVDA’s top of line GPUs are effectively impossible to buy in the current environment. As a result, companies hoping to deploy will have to wait until at least the second quarter of next year. We are not worried about the recent pullback in the stock price and in fact are embracing it. Nvidia’s forward valuation has compressed while its prospects for earnings growth have improved.
Therefore, we are significantly more comfortable with the price now than we were before its last blowout quarter. This is especially true given that we believe this is just the beginning of the AI spending cycle and Nvidia has the best offering, with leadership across both hardware and software.
Even though earnings per share (EPS) estimates jumped following the last quarter, we think they are probably still too low for 2023 and 2024.
LVMH (MC EPA)
Last purchased at €895.43 on April 21, 2023
LVMH continues to be our preferred name within the luxury space, with the best portfolio of brand sin the world. We view this company more as a staple than a discretionary stock. LVMH is well diversified across geographies and business segments. This should provide resiliency to the overall business, regardless of how the global economic situation evolves. On that front, and with China lifting its ban on group travel, we think that there is upside risk to numbers over the next one year. LVMH has emerged from COVID-19 with structurally higher margins. This combined with market share gains across most divisions reinforces our long-term conviction in the name.
LVMH is a company that we think can demonstrate high-single-digit revenue growth and low-double-digit EPS growth through 2025.
Eaton (ETN NYSE)
Last purchased at US$199.48 on July 5, 2023
etnThe electrification megatrend was evident in Eaton’s most recent earnings report. The company, which is one of our top picks in electrical equipment, delivered record quarterly EPS and lifted guidance for the full year to reflect 16 per cent growth over 2022. Eaton also reported strong growth in its electrical sector backlog, which was up 22 per cent. In addition to electrification, the company is also benefiting from other megatrends such as infrastructure spending and reindustrialization. Eaton noted the massive ramp up in government spending focused on energy security that has been driven by the U.S. Inflation Reduction Act.
We believe that ETN will demonstrate mid-to-high single digit revenue growth and low-double-digit EPS growth through 2025. As such, we do not believe the stock expensive even though it has done very well Year to date.
| Disclosure | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| NVDA NASD | N | N | Y |
| MC EPA | N | N | Y |
| ETN NYSE | N | N | Y |
PAST PICKS: November 4, 2022
Amazon.com (AMZN NASD)
- Then: US$90.98
- Now: US$137.61
- Return: 51%
- Total Return: 51%
PepsiCo (PEP NASD)
- Then: US$178.78
- Now: US$183.63
- Return: 3%
- Total Return: 5%
Deutsche Telekom AG (DTE ETR)
- Then: €19.55
- Now: €18.80
- Return: -4%
- Total Return: -1%
Total Return Average: 18%
| Disclosure | Personal | Family | Portfolio/Fund |
|---|---|---|---|
| AMZN NASD | N | Y | Y |
| PEP NYSE | N | N | Y |
| DTE ETR | N | N | Y |
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