NASDAQ has been the hottest US stock market over 2017. However, PI Financial vice-president Guy Lapierre warns that some of NASDAQ’s brightest stars may be burning out. Instead of tech stock darlings like Facebook, Twitter and Amazon, Mr. Lapierre recommends two technology-related stocks that are already priced to reflect the risk of a pullback.
Vancouver-area PI Financial vice-president and portfolio manager Guy Lapierre says he maintains a cautiously upbeat attitude toward the stock markets, although he underlines the necessity (and difficulty) of finding promising relative valuations. “This long into an economic recovery, I’d be a liar if I said I wasn’t nervous come every September,” he says.
“Broadly speaking, troubles or falls in individual markets have taken out a lot of momentum,” he continues, citing the 2014 oil price crash and Brexit as examples. “A lot of value has been taken out of there.” Looking ahead, he predicts that the markets might still have some spring in their step, adding that sector rotation for capital currently invested in low-return assets could drive up activity in certain areas.
Asked about the NASDAQ technology stocks responsible for much of this year’s rally in US stock capitalization, the portfolio manager says that he is still an advocate for Apple Inc. (NASDAQ—AAPL) due to its continued high-margin business, particularly its apps, and unique product offerings.
However, he has shed about half of his clients’ shares in the company due to their impressive, sustained rise since a low of about US$90 a share in May 2016. If Apple retreats and loses some value (he suggests 10 per cent could be the right amount), perhaps due to bad news related to the release of the iPhone 8 or iPhone X, he says he would definitely pick up more shares for clients.
On the other hand, Mr. Lapierre sees far less promise in tech stocks like Twitter Inc. (NYSE—TWTR), Facebook, Inc. (NASDAQ—FB), and Amazon.com, Inc. (NASDAQ—AMZN). In Amazon’s case, he describes its business strategy as “continuously losing margin to gain market share” leading to a two per cent margin in a very competitive field. “They’re never first, they’re often better,” he says of Apple. “Amazon, I still cannot figure out what the long game is.”
Meanwhile, all growth in Facebook and Twitter’s valuation has been tied to increasing user engagement. This trend seems to be turning around, and more users could abandon the companies’ social media offerings as they lose faith in the authenticity of other user profiles, opinions and information found there, Mr. Lapierre predicts. Concerns surrounding ‘fake news’ appearing on social media could eventually lead to new regulations and standards that treat social media more like the general media, rather than simply a medium of communication, he adds, possibly raising costs. “We recognize we will be outperformed short-term by some of the indexes . . . but our clients are comfortable with the reduced risk versus the higher reward,” he says. “I speculate if there is going to be a crash in the next two years, it’s going to come out of those stocks.”
In the current climate, then, the portfolio manager touts stocks that are priced to reflect the risk of a pullback. Ironically, his first ‘best buy’ might strike many readers as a global technology stock, but Mr. Lapierre argues Intel Corporation (NASDAQ—INTC) is really more of an infrastructure stock. Intel manufactures computer chips for all manner of household and industrial uses.
“The preference for Intel is really about a valuation,” he explains. “NVIDIA Corporation (NASDAQ—NVDA) and others have run up so much.” Although it does not necessarily command an advantage in a particular business segment. “They make money in every segment and the P/E (price-to-earnings) ratio is much lower” than other chip producers, the portfolio manager says. Mr. Lapierre asserts that Intel will be the manufacturer of choice for chips used in the ‘Internet of everything’, networking between household electronics and appliances, as well as for commercial applications that requires large quantities of chips, such as inside computer servers.
Thus Intel is one of his picks for top tech stocks to buy now.
The portfolio manager says his second ‘best buy’ recommendation, LKQ Corporation (NASDAQ—LKQ), is a value stock with upside growth potential, too.
It’s not quite a technology stock, but LKQ is consolidating the auto parts industry in North America, Europe, and Taiwan. “It makes do-it-yourself car maintenance easier. We can see widespread adoption of mail-order auto parts as an expansion opportunity,” says Mr. Lapierre who notes that he first heard about the company as a car enthusiast.
Through its website, customers can select their vehicle make and model, along with the job they need to do. LKQ then picks all the pieces necessary to do the work (new or secondhand), and sends them by mail. “The real opportunity, we think, is Europe because of the complete lack of competition,” says Mr. Lapierre.
The higher part price and generally longer lifespan of European vehicles bolster the business case for expansion on the continent. The portfolio manager says he would hope to buy on a pullback of 10 per cent to 15 per cent, making it an undervalued stock to invest in. Its stock has already climbed 14.25 per cent over the last year.
This is an edited version of an article that was originally published for subscribers in the November 3, 2017, 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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