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Many investors expect the economy to tip into a recession in the coming months, but not Shane Obata. The portfolio manager at Middlefield Capital Corp. in Toronto believes the economy has bypassed a deep downturn and could start gaining traction next year.
“It’s starting to feel like 2022 was a cyclical bear market within a larger structural bull market,” says Mr. Obata, who oversees about $400-million of his firm’s more than $2-billion in assets.
His forecast is based largely on the labour market, which remains strong in North America, and easing inflation.
“We’re still seeing the cost of living increase, but that increase has lessened,” Mr. Obata says. “In my view, the labour market is the most important indicator. People are employed and the economy is near full employment. It’s difficult to see a long, drawn-out recession.”
Mr. Obata believes it’s a particularly good environment for the technology sector, which he invests in through Middlefield Innovation Dividend ETF MINN-T. After getting hammered in 2022, tech stocks have rebounded so far this year and Mr. Obata sees more growth ahead.
The exchange-traded fund (ETF), with top holdings such as Broadcom Inc. AVGO-Q, Motorola Solutions Inc. MSI-N and Canada’s Constellation Software Inc. CSU-T, has seen a total return of 26 per cent year-to-date as of July 24, according to Morningstar Inc. The performance is net of fees.
The Globe and Mail spoke to Mr. Obata recently about his investing style and what he’s been buying and selling in the tech fund.
Describe your investing style.
We look for companies with a sustainable competitive advantage. They have durable moats. An example in the tech sector is a company that is unlikely to lose customers due to high switching costs, maybe because of how their contracts are set up or because the logistics around transferring are too costly and complex. Another example is a company with leading research and development capabilities, which means it’s well ahead of its peers in terms of innovation. We look to buy these quality companies at a reasonable price.
What’s your take on the current market environment?
We think earnings growth for 2023 will come in flat. But we are already looking to 2024 and 2025 and think the S&P 500, for example, can grow earnings by more than 10 per cent in each of those two years. We think the uptick in the markets isn’t just speculation and there are fundamental underpinnings to it. The market has so far correctly anticipated that we’ll avoid a recession. That’s our base case.
What have you been buying or adding to your innovation fund?
Broadcom is a stock we’ve owned for a long time and added to in the second quarter. The company provides growth at a reasonable price in the high-beta semiconductor industry, known for having stocks that are a little more expensive. It’s mostly a semiconductor company, but also has some software and is well-diversified across geographies and business segments. It’s also a beneficiary of the growth in artificial intelligence (AI). AI shipments for the company are currently about 15 per cent of semiconductor sales, and we think this can grow to 25 per cent next year.
Another stock we’ve been adding to is Palo Alto Networks Inc. PANW-Q, which is our top pick in cybersecurity software. The company is building out its platform of cybersecurity solutions and was also recently added to the S&P 500, which we think is a validation of its business model.
What have you been selling or trimming?
We’ve been reducing our position in Booking Holdings Inc. BKNG-Q. It’s still our top pick in online travel but we have some macro concerns around travel spending. While it has been a resilient part of consumer spending, we think that’s partly due to pent-up demand from the pandemic. We think the higher cost of living, including higher mortgage payments and other expenses, could have an impact on travel budgets. It’s still a great company, but we’ve been paring back.
Name a stock you wish you bought or didn’t sell.
Salesforce Inc. CRM-N. We own it, but we significantly reduced our position over the past 18 months. We were a little worried about – and still are – that the company was dependent on large-scale mergers and acquisitions. The stock has done really well this year after facing some pressure from activist investors. It’s now trying to focus more on efficiency and cost optimization. So, we missed out on some of that recent growth. We’d want to see continued margin improvements and discipline on the mergers and acquisitions front before deciding whether to buy it again.
What advice do you have for new investors?
There’s always something to be worried about in the markets. New investors may not realize this, but they should remain invested and be patient. Optimists tend to win out over time.
This interview has been edited and condensed.
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