wheat vs. chaff (viii)

The most difficult area of the market to navigate right now, for me anyway, is the tech area. The main task, as I see it, is to separate stocks that are creatures of the stay-at-home economy and which are being pummeled with some justification–because their earnings depend on continuance of pandemic conditions–from those with stronger businesses, which although they benefitted substantially from the pandemic, can continue to prosper in a post-pandemic world.

It’s no accident, in my view, that tech issues peaked as soon as the new administration came into office in early 2021 and began to work to bring covid under control. The stocks been slammed again, in greater or lesser fashion, when the stock market began to make another serious move south late last year–in anticipation of the normalization of interest rates now underway.

The IT + Communication services sectors still make up a third of the S&P 500, so it’s probably not a good idea to have no strategy for this part of the market. The simplest one would be to make the tech part of one’s portfolio look like the index, through a sector ETF. That would mean no outperformance from having “good” tech names, but would be an easy way to avoid having to figure out the complicated mess that these two sectors have become.

I’ve ended up with a three-pronged approach:

–focusing on semiconductor manufacturers and on the companies that make the manufacturing equipment that goes into semiconductor fabs. This revolves around the idea, which I’ll be writing more about soon, that the world has decided that having most of its cutting-edge capacity located at TSMC in Taiwan isn’t such a great idea.

–trying to figure out stocks to avoid, meaning ones that owe a large proportion of their success to appeal that ultimately derives from the covid quarantine. SPACs in general are one. Companies like Zoom and Roku are another. This doesn’t mean I won’t be wrong about at least some of them. I just choose not to bet on them.

I don’t think any company would opt to go public through a SPAC (ceding a quarter of its value to the SPAC promoters) unless an underwritten or direct listing were simply not possible. I worry that ZM is ultimately a feature rather than an app–and that users will migrate to clunkier services from big tech companies once ZM begins to charge. I worry that a lot of ROKU’s success comes from being bundled into TCL tvs–and that manufacturers like Samsung, Sony or LG have adequate substitutes.

For what it’s worth, my biggest tech holding is MSFT, which I’ve owned since Steve Balmer was forced out.

–looking for traditional value names. That is, companies that are not necessarily the best operators, but which have been beaten down to the point that their asset value is higher than their market cap. HOOD stands out to me as one of these. Regular readers will know that I’ve (totally incorrectly, so far) thought PTON is as well.

This may also be a riskier endeavor than I’ve realized, maybe because I’m a growth investor dabbling in value. Still, I find the price action head-scratching. For example, the market has known for months that PTON’s former head built bike inventories to astronomical levels last year. I would have thought Wall Street would have factored the inevitable writedown and the consequent possibility of having to tap its credit lines into the stock price long ago. Not so. Maybe this is just the bear market. But it’s also possible that deep value investing no longer has the clout to stand up to AI-driven selling.

Leave a Reply

%d bloggers like this: