With 2014 off to a somewhat rocky start, experienced investors have understandably re-calibrated their tolerance for risk. After a great 2013 for many market participants, nobody wants to round-trip high-performing stocks back down to their early 2013 prices.
Regular readers know that we ‘do tech’ differently at Crabtree. We’re disciplined, and pretty much ignore the headlines when it comes to managing the Crabtree Technology portfolio. Instead, we focus almost entirely on financial and operational performance. Cash flow, market share and a history of meeting the Street’s and managements’ own performance goals are really all that we believe matters most.
But we’re certainly not oblivious to the amazing breakthroughs going on around us. And occasionally, our portfolio holdings benefit from being in front of some very cool trends.
Here are just some of the technology trends we’re tracking, and where applicable, the Crabtree Technology portfolio hopefully will benefit from those those waves of innovation:
Mobile:Verizon (VZ), Turkcell (TKC), NTELOS (NTLS), Inteliquent (IQNT).
Mobile Payments: Green Dot (GDOT), Heartland Payment (HPY), Euronet Worldwide (EEFT).
Carbon Fiber /Composite Materials: Hexcel (HXL)
Social Media/Marketing: ReachLocal (RLOC)
Web-based Manufacturing and Logistics: Shutterfly (SFLY), Geeknet (GKNT)
Drones and Robotics
Big Data: Cray
Broadband: MaxLinear (MXL), Marvell (MRVL), QLogic (GLGC)
Voice-over-IP: AudioCodes (AUDC), ShorTel (SHOR)
The ‘Smart’ Grid: EnerNOC (ENOC)
Software-as-a-Service: inContact (SAAS), XO Group (XOXO)
Customized Genetic Medicine
The Internet of Things
Mind you, we didn’t look for trends first, then for companies addressing them. And as you can see, there are plenty of trends we aren’t invested in. That’s not because they aren’t real and potentially lucrative to the players involved. Rather, it’s simply because there are not many players that meet our high standards.
Take, for example, drones (specifically, unmanned aerial vehicles). Drones have proven to be extremely capable and cost-effective in a military context. I have no doubt that drones will also find uses in the civilian world, whether by delivering packages, helping with search-and-rescue missions and in pure research (flying into active volcanoes).
But there is only one pure-play public company, AeroVironment (AVAV) addressing this space and it is already under competitive threat from dozens of private companies. So while millions of dollars are being spent now and will be in the future, it’s not investable while remaining true to our discipline.
So what is defensive about tech stocks? The fact that the trends listed above represent large secular trends, rather than cyclical ones. By ‘secular,’ we mean that the trend or technology shift is independent of the larger economy and stock market levels. A market downturn will affect all stocks, some more than others. But progress in these trend-setting areas will go on, whether the economy is strong or weak.
For example, because the cost per driven mile for an electric car is perhaps 1/3rd to 1/4th as expensive as for a standard gasoline-powered vehicle, a breakthrough in battery capacity and charging times would cause a massive and profitable shift, even during an economic recession. But we’ll wait for public companies successfully looking for battery breakthroughs or other trends, rather than trying to guess the winners too early in the game.
Speaking of playing defense, the performance for the Crabtree Technology model during January was solid: While market indices were lower across the board, the model outperformed every relevant benchmark. The model declined 1.6% in the month, compared with a 2.8% drop for the Russell 2000 (RUT) benchmark and a 3.46% decline for the S&P 500 (SPX).
Our internal benchmark, the Merrill Lynch Technology 100 (MLO) fell 2.0% in January. The most widely held technology ETF, the State Street Global Advisors’ Technology Select SPDR (XLK) fell 2.6%.
Please see the Crabtree Technology portfolio on Covestor for a more complete picture of the model’s performance as well as important disclaimers.
DISCLAIMER: The investments discussed are held in client accounts as of January 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.