If you didn’t buy technology stocks during the inflation tantrum last week, don’t worry, you will get another chance.
I offer eight stocks for your shopping list, below, from a tech fund manager with a great track record.
First, here’s why we’ll see more inflation tantrums, and why they’ll be a buying opportunity rather than the start of a bear market.
•Inflation is going to pick up. We can expect more inflation because of all the stimulus, and because personal savings have surged to a post-war high of 14% of GDP. That’s a lot of pent-up demand to drive prices higher.
“People are ready to get out and spend money and be happy and live life,” says Kevin Landis, who manages the Firsthand Technology Opportunities fund
“That unleashing of energy will be really powerful. We are all going to hold our breath and see if that means inflation, or not.”
It probably will, say two economists I follow. Inflation will rise to 2.2% by year-end, from current levels of 1.5%. predicts Jim Paulsen, an economist and market strategist with the Leuthold Group. Ed Yardeni of Yardeni Research predicts it will go up to 2.5%-2.8%. Both economists are referring to the core personal consumption expenditures deflator index.
•Bond yields will keep going up. The 10-year yield is taking a breather, following the sharp rise that spooked investors last week. But bond yields will increase as more signs of inflation emerge. The 10-year yield will reach 2% by the end of this year, predicts Paulsen. It was recently at 1.5%. Rising rates spark stock selloffs because higher yields make bonds more attractive. Higher rates also reduce stock valuations in models that use the 10-year bond yield to discount distant earnings back to the present.
•Sentiment remains rich. This makes the market more vulnerable to pullbacks. Complacent investors are easily “surprised” by unforeseen events. Corporate insiders are cautious, also a sign of a vulnerable market.
•Pullbacks are normal. Following the 74%-98% rise in the S&P 500
since last March, investors may have forgotten that stocks can go down, too. But pullbacks of 5%-10% are common. Now that so much of the growth is priced in to stocks, we will see more of them.
“We will probably have at least three or four more panic attacks over the next few months,” predicts Landis, at the Firsthand Technology Opportunities Fund.
Inflation? No worries
But like the one last week, the upcoming inflation tantrums will be buyable, because ultimately inflation is not really going to be a big problem for three reasons.
1. The Covid-19 crisis has pulled forward technology. That will create a burst of productivity growth, which calms inflation fears among investors and the Fed. Productivity growth reduces pressure at companies to pass along the higher costs of labor and materials.
2. In the background, the same factors that have been suppressing inflation for years are still in place — chiefly greater use of technology, global trade, and the aging of the population. Older people tend to spend less. And technology and trade lower the cost of goods.
3. History shows inflation during times of solid economic growth doesn’t hurt stocks, according to a study published by Paulsen on March 1. Inflation when growth is sluggish can end stock market rallies. But we will have robust growth this year, so that doomsday scenario is unlikely.
List of tech stocks
Tech stocks get hit harder during inflation tantrums because they are “long duration assets.” So much of their growth is in the distant future that when discount rates in valuation models go up, the perceived value of tech stocks falls hard.
For a short list of tech stocks to consider buying during the next inflation tantrums, it makes sense to look at the holdings of Landis’ Firsthand Technology Opportunities Fund because he has such a solid record. During the past three to five years, his fund has beaten competing technology funds by over 10 percentage points annualized, according to Morningstar. He beats the Morningstar U.S. Technology stock index by 9.7 percentage points or more annualized, over the same time frame.
His portfolio is an interesting source of ideas because it’s not the typical line up of Alphabet
though he does own Netflix
Instead, Landis likes to be ahead of the game by investing in earlier-stage tech companies that will grow because they are smaller — but still disrupters in some line of business.
Here’s a guide to some of his favorite stocks.
Roku, Chegg and Cree
Landis is not afraid to let portfolio positions get huge if he still likes the company. That is the case with Roku
They represented 21.5%, 8.3% and 6% of his portfolio at the end of last year. That’s a vote of confidence, because many mutual fund portfolio managers like to cap position size at 2%-5%, to limit single-stock risk.
“We still like these a lot,” says Landis.
He expects Roku to continue to grow because it is so far ahead of competing streaming services that are stumbling as they ramp up. “It’s kind of a mess out there,” says Landis. “Roku has done a lot of the hard work that other companies are only just getting started on.” Roku makes money by selling channel buttons on its platform, digital advertising and content-distribution services. It also sells devices.
Landis expects the online education company Chegg to continue growing now that people are more familiar with distance learning because of Covid-19.
“Companies that can facilitate distance learning are in a better position now because everyone knows what works and what does not work,” says Landis. He thinks the education sector is ripe for “disruption” and Chegg will be one of the main companies shaking things up.
Cree is a key producer of semiconductors used in electronic vehicles, which should support solid demand growth for years.
The Internet is the new corporate network and the cloud is the new data center. So the old concept of security software that guards the perimeter of a corporate network is fading fast. Zscaler
offers security systems for this new environment. There are plenty of years of growth ahead because most companies are still in the early stages of moving to the cloud. Covid-19 has accelerated this transition, given that so many people work from home.
Business Cloud platform helps people manage and learn from the vast amounts of data inside and outside their companies. The service helps managers collect, analyze, store and share data.
Domo’s “Mr. Roboto” feature helps deploy machine-learning algorithms to analyze trends, make predictions and provide alerts.
“For any business, there are a handful of internal and external metrics that people want on their personal dashboard every day,” says Landis. “Domo provides great tools to do that.”
speeds up the pace of business by digitizing forms used in contracts and agreements. Its forms replace “wet” signatures with e-signatures. It also offers software that automates the whole process, called the DocuSign Agreement Cloud.
To anyone who has used e-signatures on tax forms or work contracts, DocuSign may seem like a one-trick pony. But that’s not the case, says Landis. There’s plenty of room to expand in real estate, car dealerships and the venture-capital business, and highly regulated industries.
cloud-based accounting software simplifies back-office operations for small businesses. Aside from tracking numbers, the software helps companies connect with suppliers and clients. Customers include most of the top 100 accounting firms, and also big companies like Bank of America
J.P. Morgan Chase
and American Express
But the sweet spot for growth is the startup that’s not locked in to legacy systems. “Accounting software systems are notorious for having market share just because they are incumbent,” says Landis. “But when people are setting up companies, they want to go with the best.”
While acknowledging the potential pitfalls in special purpose acquisition companies (SPACs), which I identify here, Landis welcomes them as a streamlined alternative to the traditional initial public offerings. Like me, Landis favors SPACs with a promising sponsor lineup.
The sponsor slate at Qell
suggests it will merge with an electric vehicle (EV) company. CEO and director Barry Engle worked at General Motors
for years. And finance chief Sam Gabbita comes from OGCI Climate Investments, and a private investment fund specializing in sustainability investing called Element Partners. Given the amazing performance of Tesla
an EV SPAC may not be such a bad idea.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested GOOGL, AMZN, AAPL, NFLX, BAC, JPM, AXP, GM, and TSLA in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.