Shane Obata, portfolio manager, Middlefield Capital
FOCUS: global, technology stocks
Top Picks: Broadcom, Prysmian, Visa
MARKET OUTLOOK:
Although September is historically the worst month of the year, and volatility may return in the weeks ahead, we maintain a constructive view on the market over the medium term. This outlook is supported by three key supports that remain in place: solid earnings growth, goldilocks economic data and expected monetary easing.
Second quarter 2024 was the best quarter of earnings growth for the S&P 500 Index in nearly three years. This trend is expected to continue with consensus estimates implying earnings to grow even faster over the next four quarters. We are currently more focused on growth statistics than inflation risks. From this perspective, we were happy to see the recent second quarter gross domestic product (GDP) print show continued economic growth of three per cent in the United States driven by strong consumer spending. Ultimately, we expect the U.S. Federal Reserve to cut rates at a gradual pace starting in September.
It is clear breadth has improved and the market is being led by a new cohort of stocks. Since July 11, when U.S. CPI came in softer than expected, the Magnificent Seven has underperformed the other 493 stocks in the index by over 14 per cent. The equal-weighted Index has outpaced the cap-weighted Index by over six per cent and more than 70 per cent of stocks have outperformed the S&P 500. Year-to-date laggards are finally catching up, with the S&P Financials, Healthcare, Industrials, Real Estate, Staples and Utilities sectors all achieving new highs. These recent trends are very encouraging and make it much more likely that the recent strength in the market will be sustainable.
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TOP PICKS:
Broadcom (AVGO NASD)
Broadcom (AVGO) is the number two player in AI semiconductors, with a leadership position in custom chips made for Google, Meta and others. The AI business – which includes both ASICs and networking gear – continues to lift results while the non-AI segments are expected to bottom into 2025.
Networking – which includes AI solutions – was up 200 per cent year over year (YoY) in the quarter. This was even better than NVDA’s datacenter segment, which grew 155 per cent YoY.
The non-AI semiconductor business (which includes wireless, server, storage and connectivity and broadband) showed sequential growth for the first time in first quarter 2022, which speaks to the extent of the cyclical downturn we have seen in semis outside of AI.
We think AVGO can deliver $6.80 of earnings per share (EPS) in 2025. At a 29 times multiple that gives us a price target (PT) of $197.
Prysmian (PRY BIT)
Prysmian (PRY) is an Italian electrical equipment manufacturer that is a key beneficiary of the global energy transition. PRY’s products span across its transmission, power grid, electrification and digital solutions segments. Most notably, its high-voltage cables are used to transfer electricity hundreds of kilometers under the sea.
Prysmian has performed very well over the past few years, driven by an accelerated push for energy security resulting from the Russia-Ukraine conflict. Even so, the stock is much less expensive than other companies in the electrical equipment industry.
It had a recent acquisition of Encore Wire for €3.9 billion enhances the company’s U.S. presence while providing entry into the country’s residential construction market. Prysmian is well positioned to benefit from the global data center buildout, which is putting pressure on power grids and thereby necessitating continued investment in low and medium-voltage grids. We think PRY can deliver €4 in EPS next year. At a 20 times multiple that gives us a PT of €80.
Visa (V NYSE)
Visa (V) is the world’s number card network. While the shift towards “cashless” is nothing new, Visa continues to gain market share in major markets around the world. The business is highly recurring in nature and provides extremely high margins. We think that concerns around U.S. credit interchange are overblown.
Changes to credit interchange will be felt most by banks. Banks have two levers to protect profits, rewards paid and interest fees charged. Based on historical precedent, Visa’s total network “take rate” could remain relatively stable following any changes.
Continued growth in value-added services, which are expected to amount to greater than 25 per cent of revenues by 2026, should provide a nice hedge to the core business. Visa should deliver at least $11 in EPS. At a 28.5 times multiple – which is the five year average – that gives us a PT of $314.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| AVGO NASD | Y | N | Y |
| PRY BIT | N | N | Y |
| V NYSE | N | N | Y |
PAST PICKS: AUGUST 11, 2023
Nvidia (NVDA NASD) (10 for 1 stock split 6/10/24)
- Then: US$40.85
- Now: US$105.42
- Return:158%
- Total Return: 158%
LVMH LOUIS VUITTON (MC EPA)
- Then: €820.40
- Now: €619.70
- Return:-24%
- Total Return: -23%
Eaton (ETN NYSE)
- Then: US$218.36
- Now: US$288.88
- Return:32%
- Total Return: 34%
Total Return Average: 56%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| NVDA NASD | Y | N | Y |
| MC EPA | N | N | Y |
| ETN NYSE | N | N | Y |