Looking for the best technology stocks to buy now? Toronto-based portfolio manager Chris Stuchberry says: Go east, young man, go east. Far East.
Toronto portfolio manager Chris Stuchberry suggests that although markets are likely to remain volatile in the months ahead, investors could miss out on gains because of an overabundance of caution. “I actually think the risk is to the upside rather than the downside,” he says. “There’s a risk that investors will miss the upside because of the politics.”
The portfolio manager explains: “There’s sort of sentiment negativity with the trade war (between the United States and China) and that’s what’s occasionally giving us the downside . . . but overall we’re looking at a very strong economy.” Mr. Stuchberry is a portfolio manager at the Stuchberry Group, a part of Wellington-Altus Private Wealth since October 2017. Prior to joining Wellington-Altus, he worked as a portfolio manager at several other major independent firms. Mr. Stuchberry is a chartered investment manager (CIM) and fellow of the Canadian Securities Institute (FCSI).
While the portfolio manager concedes that markets have been choppy over the last 18 months, he also points to several positive factors for the outlook ahead, including high North American employment and the possibility of interest rate cuts.
High employment rates
At present, the US unemployment rate is less than four per cent, and the Canadian unemployment rate sits at a similarly low 5.6 per cent. As to recent ups and downs in share prices, Mr. Stuchberry notes that the long-term, secular bull market since the global financial crisis late last decade has carried on despite them. “The positive is that we’re at the very high end of that band” [trading range].
He adds: “There’s still quite a bit of investor cash on the sidelines. Investor sentiment is far too bearish considering we’re only a week off an all-time high.” Mr. Stuchberry says most economists had predicted the US Federal Reserve would raise interest rates and the Bank of Canada would follow suit earlier this year. “With the benefit of hindsight, they got the interest rate call wrong looking at the January to June horizon.” Accordingly, financial stocks did not perform as well as he expected over that period. Since then, discussion has shifted from potential rate hikes to rate cuts.
Low interest rates
Low interest rates have eaten into the profits of financial stocks, but the recent underperformance sets them up well as a value play. Mr. Stuchberry says if rates go down (he now forecasts one or two cuts this year), they could send financial stocks hurtling upward. Even if a rally takes longer to materialize, major financials are a safe bet paying healthy dividends for waiting.
The portfolio manager says: “Generally, Canadian investors are a bit too linked to the Canadian market (largely made up of the financial and energy sectors) so they have lagged a bit.”
Looking back at the long bull market of the last 11 years, Mr. Stuchberry remarks: “The leadership has basically been in the tech sector. The first leg of it was almost all on the back of Apple.” Since then, many other technology stocks, such as Netflix Inc., have ascended to similar heights. “Uber (Technologies Inc.) didn’t exist in 2008. Now we have all these companies around. What tech has really done is give us secular growth,” he says. Mr. Stuchberry adds: “We’re completely comfortable going out of Canada to get some of that growth.” About half of the assets in his clients’ portfolios are invested outside Canada, he says.
Go east, young man, far east
The portfolio manager’s ‘best buys’ are two Chinese technology stocks, Tencent Holdings Ltd. (HKG—0700) and Alibaba Group Holding Ltd. (NYSE—BABA).
Both firms essentially operate wholly in China, doing more than 95 per cent of their business there. China already has the largest Internet-using population in the world, but it is only about half of its overall population of 1.3 billion. As such, Tencent and Alibaba have far more room to expand than comparable firms operating in the United States, for example, he asserts.
At the same time, the companies already have proven track records in terms of expansion and very healthy cash flow, raising revenue by 20 per cent or more annually. In fact, Alibaba’s revenue has grown by 50 per cent annually in the last couple of years.
Overall, Mr. Stuchberry dismisses concerns the US-China trade war could dampen the results of either company. Given the relatively small economic relationship between the two countries as is, the trade war is unlikely to become so fierce or protracted it affects Chinese consumer habits, on which Alibaba and Tencent rely.
Mr. Stuchberry says of both: “You’re buying a growth stock with a pretty long runway we think . . . with a really solid balance sheet like that, there’s a lower chance of financial troubles or bankruptcy even though you might be stepping into a bit of a political hotbed.”
(Disclosure: The securities mentioned above may or may not be suitable for you. Consult your own financial advisor before making any decisions. Mr. Stuchberry and his clients hold shares of Tencent and Alibaba.)
This is an edited version of an article that was originally published for subscribers in the July 19, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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