First, hats off to Keith McCullough and the Hedgeye Macro team for calling Quad4 in Q4. Stunning call.
Second, to answer the immediate question of most PMs in weeks like this, ‘where can I find more Shorts?’, please see our recent ‘3 Vectors For Shorting Tech’ note HERE (and call or email with questions).
Third, on crazy days (weeks!) like these, PMs want to triage, right? What are we adding to, what are we liquidating, what are we covering. That is the hardest thing to do with any portfolio, especially with assets bought or shorted under certain assumptions that get tested with volatility rather than getting tested by changes in fundamentals. Usually, mistakes happen in such circumstances.
The best thing to do in the current situation is to push back from the screen, take out your handy pen or pencil + sheet of paper, and proverbially step back from the fray with the question: with a longer than 2018 duration time frame what would I be buying / shorting today? Everyone will get to a different answer, but those answers are a much better path towards action than the normal triage that happens in these circumstances.
To use me as an example, my CREE Long continues to get destroyed, and my SNE Long is cracking. My 5 Shorts are just fine (AVLR, ALRM, ADT, MCHP, DBX), but still trying to triage is going to make a mess in weeks with this kind of volatility.
Instead I can push back from the table and ask the better question: WHAT IS GOING TO WORK ON A GO-FORWARD BASIS?
VECTORS LONG
- I think 5G has some chance of victory for 2H19 shipment/revenue and 2020 ecosystem growth. QCOM and ERIC immediately come to mind.
- I think TSM, SLAB, and CREE will each have bigger cycles in the next 3-5 years compared to the recent 3-5 years, as their fundamental positions are moving up and to the right. TSM also comes with a natural pair; it is the right medium and long-term pair against Intel’s shuffle towards the dustbin.
- In software it is still early. Valuations are still epically high. But…there are some ideas already percolating such as $3-10B software companies still very early in their respective market penetration / disruption curves. We previewed BL in this class in June but the sector has lots of ‘em. Also, under this umbrella is any company that is moving in the direction of post-cloud, i.e. enabling application creation and workflow movement regardless of location. A lot of this is PaaS that is undermined economically by free Kubernetes, but not all of it. We are moving forward with some discovery in that area.
VECTORS SHORT
- Software companies that have enjoyed a great equity ride but really make more sense as part of another company rather than as a standalone offering.
- Software companies brushed with growth valuations facing a tougher march forward with limited market growth.
- PaaS offerings undermined by free Kubernetes.
- Semiconductor companies that have benefited the most from slower pace of volume growth which translated to inflation (i.e. memory, etch/dep) and where the next 3 years will not at all look as good as the last 3-5.
- Hardware and system companies that have survived on a cyclical bounce which, as it recedes, reveals diminished or negative secular growth.
Usually, I just work on single stock Longs & Shorts and we deliver about 2-4 new ones per Q (or refreshed ones with opportunity). But in weeks like this with aggressive volatility spikes, it is worth pushing back from the table and using a ‘crisis’ towards creativity. If you are interested in learning more, I’d be happy to help, simply reply to this email.
Best Regards & Good Luck Out There!
Ami Joseph
Managing Director
Yosef Vaitsblit
Analyst
