Tech, media and gaming stock to buy
According to the firm’s 13F filing, the Corvex Management founder and chief investment officer, a protégé of Carl Icahn, added positions in cloud giant Salesforce and gaming company Zynga in the second quarter. The filing does not include the purchase date or average price.
Because no one knows how Covid-19 will play out, he has positioned his portfolio to include pandemic beneficiaries, reopening plays, and “event-driven names.”
Corvex’s Salesforce investment is worth $77.2 million. Investors are betting on a hybrid in-office and remote work model to dominate the future of work, and the stock is up nearly 12% year to date.
The firm increased its stakes in Alphabet and Amazon, as well as media companies Altice USA and Disney, as well as Coca-Cola and restaurant corporation Bloomin’ Brands. It also increased its stake in MGM Resorts, where Meister serves on the board of directors, to $668.5 million. MGM’s stock has risen around 25% this year as the Las Vegas-based hotel and casino company works to strengthen its digital strategy.
Corvex reduced its stakes in T-Mobile, Activision, and Ajax while exiting from Netflix and Expedia.
It also sold its holdings in Global Payments, whose stock is down nearly 22% year to date, and Fiserv, whose stock is down slightly in 2021. Payments technology companies have suffered this year as buy-now-pay-later businesses have grown in popularity.
Software stocks on the rise
According to a regulatory filing, Miller Value Partners invested $130 million in Splunk in the second quarter, making it one of the firm’s largest holdings.
As industry competition heats up, the software company underperformed in 2021, losing 16 percent of its market share, but some analysts believe Splunk can reclaim market share. UBS upgraded Splunk to buy from neutral last week, citing promising customer discussions.
This stock selection appears to be out of character for the big value investor. Miller, on the other hand, has been betting big on growth and has made a fortune as an early investor in Amazon and bitcoin.
Miller owned $138 in Amazon common stock as of the end of June, and the investor is also a large holder of the e-commerce giant’s bullish call options.
In the second quarter, the investor also purchased $30 million in Coinbase stock. Miller has been a long-time supporter of bitcoin, having begun purchasing the cryptocurrency at prices ranging from $200 to $300 per unit.
Miller previously managed the Legg Mason Capital Management Value Trust, which outperformed the S&P 500 for 15 years in a row from 1991 to 2005. However, the fund suffered massive losses during the financial crisis, tarnishing Miller’s track record and resulting in a massive client exodus.
Miller now co-manages the Miller Opportunity Trust (LMNOX) at Miller Value Partners, which manages approximately $2.6 billion in assets. The fund is up about 10% this year after returning nearly 29% in 2020. According to Morningstar, its five-year and 10-year returns rank in the top percentile for its category.
UK stocks set for a sprint
HSBC analyzed 68 “midcap” — or medium-sized — company stocks in a research note published last week, comparing 2019 earnings to their expected earnings in 2022.
“The market has already priced in a recovery for the most part. There are 24 names among the 68 where consensus does not expect a full recovery by FY22… Only 12 are still trading below the prevailing share price on 1 February 2020 (before the pandemic),” the analysts led by Michael Tyndall wrote.
The stocks that “stand out” among the 12 are retailers Marks & Spencer, WH Smith, and Dixons Carphone, drinks manufacturer Nichols, office rental firm IWG, and food producer Greencore. “All have been hard hit by the pandemic – in large part due to working from home – and we believe they will recover fully in time, but the stock market has yet to price this in. All of these names are rated Buy by HSBC analysts.
Based on recent company results, the analysts revised some of their target prices and earnings forecasts. “The target price is based on the analyst’s assessment of the stock’s actual current value, though we expect the market price to reflect this in six to twelve months,” HSBC explained in a research note.
HSBC raised its target price for TT Electronics to 315 pence ($4.36) from 310 pence and maintained its buy rating on the stock. “On the back of ongoing self-help measures, we see scope for positive surprise to the upside,” the analysts wrote.
Analysts raised their target price for semiconductor supplier XP Power from 6,100 pence to 6,490 pence. “We have a Buy rating because we expect growth to surprise on the upside due to the strength of the semiconductor capex cycle,” the analysts wrote.
distributor of audio-visual media HSBC has also assigned a buy rating to Midwich. “Following the strong trading update, we update our forecasts to reflect the faster-than-expected recovery. “The H1 2021 trading update showed a strong rebound with healthy organic revenue growth of 25% y-o-y [year-over-year] vs our estimate of -4 percent,” the analysts wrote. HSBC raised its target price for the stock from 585 pence to 630 pence.
Investors looking for U.S. alternatives
Respondents to the August Bank of America Fund Manager Survey are still heavily invested in stocks, but their allocations have been reduced by 4 percentage points to a net 54 percent overweight position, the lowest since July 2020.
Wall Street professionals maintained their allocation to U.S. equities at 11 percent overweight, but said they are beginning to be concerned about some issues that could call into question the long-held belief that the United States, while not without challenges, is the best place to grow money.
The net 3 percent of investors who said they are taking more risks than usual fell 10 percentage points from July to the lowest level since October 2020.
“Historically, risk levels have paralleled equity allocation,” Hartnett wrote in his survey summary. “Risk levels, as well as the rolling over of growth expectations, have contributed to the peaking of [fund manager survey] investor equity allocation.”
The longer-term threat to the TINA trade is that there is no alternative to the United States.
Though domestic investing has not been without risk over the years, a relatively consistent level of corporate profit growth combined with a highly accommodative Federal Reserve has left investors with little choice but to have significant exposure to US equities.
In the most recent Bank of America survey, investors expressed growing concern about trade threats – “TINA Turners,” as Hartnett referred to the legendary R&B singer.
These concerns include a possible Fed policy error, a future halt to fiscal aid from Congress, credit issues in China that could reverberate in the United States, and the consumer, who has powered domestic growth since the pandemic-triggered two-month recession ended in April 2020.
A whopping 84 percent of investors expect the Fed to begin reducing, or tapering, its monthly bond purchases by the end of the year, with the signal most likely coming at the Federal Open Market Committee meeting in September.
Investors believe that emerging market instability via China is the greatest risk to financial stability, despite the fact that short bets against Chinese stocks are among the most popular trades.
Respondents continued to name inflation as the most significant “tail risk,” or unlikely event that could cause major problems. Respondents’ views on inflation have also shifted, with only 4% expecting higher inflation a year from now and the Fed deferring interest rate hikes until 2023.
Global growth prospects have also deteriorated, with a net 27 percent expecting a faster pace in the coming year, the lowest level since April 2020. Corporate profit expectations have also dipped, with only 41% expecting earnings to rise, the lowest level since July 2020.
Portfolio managers reduced their exposure to emerging market and other global equities while also shifting away from utilities, staples, and energy and into pharmaceuticals, banks, and technology.
The Bank of America survey includes 257 panelists with $749 billion in assets under management.
Are the stocks to buy Chinese ones?
Major Chinese stocks and ETFs that trade in the United States plummeted in July as China ramped up its efforts to rein in the internet and other companies. The market then attempted to recover, but stocks and ETFs are now back to late July levels, which for some are 52-week lows.
Dan Niles, founder of the Satori Fund, said he bought a basket of 50 internet stocks when China’s stock market crashed last month and continues to hold them. However, it has not been easy. He claims to be “catch[ing] the falling knife, and the knife has been cutting off fingers.”
“The good news is that I’ve been shorting a basket of US stocks against it, and they’ve taken a beating,” he said in an interview.
According to Niles, Chinese officials have sent mixed messages. On July 27, he said, officials in China said the market could stabilize, but on Tuesday, Chinese regulators moved to impose more regulation on internet companies, sparking another sell-off.
“They went from ‘stocks could stabilize at any time’ to ‘people are misinterpreting what we’re saying,’” Niles explained. “Now they’re talking about regulatory reform over the next five years, which are two completely different statements. I’m not sure you can trust a lot of what comes out of China. It’s one of those things where, based on the data, our conviction level today is something we’re trying to think through, and we’re becoming more selective with the stocks we do own in China.”
On Tuesday, the State Administration for Market Regulation issued draft rules prohibiting unfair competition among internet companies. Alibaba fell 4.9 percent in US trading, Tencent Holdings fell 3.8 percent, and JD.com fell 3.6 percent.
In July, Chinese regulators engaged in a frenzy of activity aimed at the internet and other stocks. Foreign listings were also discouraged by officials. For example, shortly after Didi Global went public in the United States, regulators launched an investigation.
Tencent and other gaming companies were also chastised by state media.
Alibaba, the world’s largest online retailer, had already come under fire and was fined $2.8 billion in April as a result of an anti-monopoly investigation. Late last year, Chinese regulators also halted the IPO of its sister company, Ant Financial, forcing the company to restructure. Meituan, a food delivery service, is also being investigated for alleged monopolistic practices.
Where to Invest
Niles stated that his strategy has been to look at industries where China has already compelled change, such as gambling and video games. He also likes electric vehicles because China is the world’s largest EV consumer and hopes to lead in that sector. The industry also employs a large number of people.
He points out that only about 70% of China’s population is online, and that 40 million to 50 million people are added each year. China’s growth is also superior, with GDP growing two to three times faster than the United States over the last several decades.
Niles noted in a report that the ETF was down more than 50% from its peak in February, while the Nasdaq was up 11% during the same period.
“While there appears to be an opportunity for this performance differential to narrow somewhat, we are losing patience with China’s confusing political statements, which are making fundamentals somewhat irrelevant,” he wrote.
Officials in the casino industry have been tightening regulations since 2015, but especially in 2020, when they focused on junkets, he added.
“We believe the risk-reward in Chinese technology names is compelling when paired with shorts in US technology names, but as we have seen in the past, this may not matter in the short term as capital flees China,” Niles wrote in the report.