“We live to play another day”
–Farmer Fran (played by Blake Clark) in the all-time classic movie The Waterboy
Aren’t our jobs the best? We get to be intellectually curious people, always studying new trends or business models, and we make money when we are thoughtful about what makes true corporate success and failure. I know the robots are coming, and maybe we are already akin to ‘buggy whips’, but I promise that the robots will never enjoy what we do as much as we all do right now, today.
The flip side is that when we are wrong it can feel pretty terrible, and can amount to a complete public humiliation. In those moments, it is important that we wake up the next morning, take Farmer Fran’s words deeply to heart, and ‘live to play another day’.
Back to the Global Macro Grind, tech edition.
(Hi there, my name is Ami Joseph, and I am the Tech Sector Head at Hedgeye writing my first Early Look!)
Top of mind today is admiring how extensively the macro team has crushed it in the last ten months, in large part driven by being LONG and strong technology stocks! So we thought we’d hear from them directly what types of stocks they are looking to be LONG today in tech?
Keith says: LONG
- GROWTH: Real Organic Growth
- SIZE: Long Large Cap
- QUALITY: Low Deb/EV
There it is. Growth + Size + Quality. In tech, the top two that fit the profile are FB and GOOGL, but the process definitely extends beyond just those two stocks. CRM is in a funny spot, maybe borderline. The core business is quickly becoming a commodity, which doesn’t mean they lose customers in the core but maybe it will be hard for them to grow organically? As I wrote, borderline fits the process and maybe falls off with one more deal. But there are many others that can populate Keith’s factors. Do you have any companies in your portfolio that fit Keith’s description? Has this process worked for you this year?
Below are the top winners and losers in tech YTD. Have you picked correctly so far? See anything on the winner list that you want to short, or on the loser list that you want to go long? WE DO!
If we juxtapose Keith’s comments to our process, there are two elements that really stand out from what he mentioned.
- Factor 1: organic growth
- Factor 3: balance sheet quality
Both of these elements have been near and dear themes to us in the last year, but…not on the Long side. We have had fun finding Shorts that represented the flip-side of Factors 1 + 3. We like Shorting stocks in technology where the equity values have floated higher with a greedy market, but where the market may be mis-interpreting inorganic growth as sustainable organic growth. In these cases, forward estimates often reflect a belief in organic growth that cannot be matched by reality. The equity thus sets up for a nice big fall when the truth comes out. We have especially loved when this gets combined with factor #3, as in, a balance sheet that needs a diaper change (maybe we should have termed it Factor #2!).
For example, SABR was an especially fun and rewarding Short for us. The company had put up a couple of years of decent topline growth, and consequently told the Street to project those growth rates forward into the future. However, when we stripped away the inorganic factors, the real organic growth rate was much lower than the Street was modeling for the future! Even worse, management had told investors to expect burgeoning cash flows to accompany the fictitious revenue growth, a necessary dupe given the company has a bad and worsening balance sheet. The stock fell hard when the reveal happened, fell again at the next reveal, and fell one more time on that last trash can kicker. For those who like shorting stocks like Sabre but who may have missed it, don’t fret, we believe there will be another good entry point ahead on the short side after better 1H data gets out of the way.
KEYS, formerly known as Agilent Test & Measurement, is also shaping up nicely in the no-growth category as well. Keysight is getting disrupted in its core market, and they are pulling M&A levers to cover it up:
- They are so desperate that they just paid more than 3x sales for a company that itself has only grown through M&A in the last decade and used equity as partial funding (ouch!)
- The acquired company was smacked down by the SEC and forced to restate 2x in the last ten years, and whose post-deal announcement of a $45m tax asset write-down is the smoking gun proving they were at it again in recent years!
- Bottom-line: it is ok to be a no-growth or declining company and use M&A to grow. Just don’t try to paper over the fault lines by telling investors to expect an organic growth rate, because eventually the truth will out and the stock will fall. Why do companies inevitably try to fool us? Because the stocks of no growth companies get much, much lower valuations than do growth companies. But it is better to accept the lower valuation, buy companies if you must, and find true paths forward instead of trying to manipulate the market into seeing your company as something that it is not.
Complacency may now be king and passive may be the new active but there is no shortage of great tech ideas on the short side. Hit me up using for an introductory 20 minute phone call or face to face hello if you know your Hedgeye salesperson’s email!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.13-2.30% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6165-6335 (bullish)
Nikkei 195 (bullish)
DAX 123 (bullish)
VIX 9.49-11.53 (bearish)
USD 96.20-99.10 (neutral)
EUR/USD 1.10-1.13 (bearish)
YEN 109.03-111.91 (bearish)
GBP/USD 1.27-1.30 (bullish)
Oil (WTI) 45.69-48.32 (bearish)
Nat Gas 2.83-3.16 (bearish)
Gold 1 (bullish)
Copper 2.49-2.59 (bearish)
Best of luck out there today,
Ami Joseph
Tech Sector Head
