“You seem a man more capable of drowning in your piscina than in some deep thought.”
So wrote the famous Russian/American poet Joseph Brodsky (1) in “The Bust of Tiberius”, when contemplating the likeness of the Roman emperor.
Well, I guess I have Russia on the brain a bit, but who can blame me? Current events generate much noise, many headlines…but I think it is worth remembering that on this date in 1943 the Russian army won the largest tank battle in history at The Battle of Kursk. The Soviet military “destroyed as much as 40% of the German armor”, forced the Germans to retreat to pre-battle positions, and in August began an offensive that forced the German army into retreat “all along the eastern front”. Thank God for the Russians.
Back to the Global Tech Grind…
For those of you that don’t know me, my name is Ami and I am the Tech sector head at Hedgeye having joined in the summer of 2016- it has been fantastic getting to know our great clients! Anybody want to guess how tech stocks have performed so far in 2017? Everyone knows that the Tech sector has crushed it- but did you know the sector actually has exhibited significant dispersion in single stock performance?
In fact, while the Tech sector has outperformed consistently across 2016 and 1H17, within the sector itself there have been some large performance reversals during the past 6 months.
Consider this:
- Top-rated vs bottom-rated sellside stocks has offered strong alpha capture (over 1000bps delta) YTD, a complete reversal of 2016
- Expensive tech vs cheap tech is also generating alpha, with the spread of most expensive versus least expensive capturing 1400bps YTD, reversing the 2016 performance where cheap overtook expensive by 5300bps
- Software is the top performing sub-sector YTD but last year was miserable, and the reverse is true of Hardware
- Lastly, if you had been long + short consensus Buyside positioning on short interest, in 2016 you would have minted 340bp of alpha, but in 2017 YTD you would be down ~200bp already
These are not the tools we use to pick stocks. On a daily basis, we use fundamental bottom-up analysis to find great longs and shorts. In the last year, our shorts have trended towards companies that are adding debt, wasting cash, and making stupid acquisitions (sometimes using equity). Intel, Sabre, Keysight, and MicroSemi all fit the bill…
However, a couple of times per year it is a good exercise to push back from the desk and look at the sector from a top-down perspective. At Hedgeye Tech, we do this kind of process review twice per year, and this time we decided to peer into a couple of additional tools to complete the exercise:
- How are ETFs impacting single stock performance in Tech
- What are the top performing funds buying and selling to generate this much alpha?
This exercise generated some striking notes. First, did you know that Seagate Technology PLC (NASD: STX, ~$12b cap), one of the last remaining manufacturers of hard disk drives (HDD), is the single stock with the highest % equity ownership of ETFs in the top 75 companies by market cap in the Tech sector? To us, that is shocking.
The ETFs in question are plain vanilla tech exposure vehicles, and they somehow decided to own one of the least creative companies in the sector. Seagate is a proud manufacturer of a technology that is being displaced. The company has had approximately two decades of warning that this would happen, and has done nothing to avoid the fate of difficult choices or slow, painful death.
The company broadcasts the hope that the majority of their product will not be displaced, but we think the truth is closer to the fact that the company is surviving now on a thread of tight NAND supply forcing customers to buy more HDD in the meantime. Ahead of the second-half electronics buying season, PC buyers have shifted their mix of flash or HDD-based PCs back towards HDD due to steep NAND prices and component shortages. Maybe in the very short term the ETFs will be right!
But clearly, the ETF owners don’t realize that together they own more than 10% of a buggy whip maker. They have no idea how the pendulum might swing in Seagate’s favor for a brief moment today, before swinging back the other direction and crushing the company’s long term position. Seeing high ETF exposure in Apple is one thing; but seeing it in Seagate is another. It is completely nonsensical, and it will end BADLY! Brodsky might as well have been referring to Seagate when he wrote: “verbs that wait in line to view the preterit entombed” [paraphrased: Seagate waiting to watch the past go by].
For more information about ETF exposure, best Fund buys or sells, or the detail behind our sector review, email us at ; or take a look at our Halftime Report presentation HERE (please contact if you do not have access).
Удачи там! [Translation: good luck out there!]
Ami Joseph
Technology Sector Head
