Wolfe chart expert Rob Ginsberg provides insight into the industry’s weakening technicals. On the cusp of a new high, the action reveals developing vulnerabilities. Rob points out that net new highs on the NASDAQ are punk, Semis are acting heavy, small caps are weak, and momentum in F.A.A.N.G. is waning. On the flip side, the bullish momentum in Software and IT Services (particularly FinTech) is relentless, providing some of the strongest uptrends in the broader market.
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Our Wolfe Tech Universe consists of about 250 stocks split into five sectors: Hardware, Semiconductors, Software, Internet, and Services. We plot their 3- and 12-month performance and provide a table of price changes in our weekly Wolfebytes (link). Now we have added subsectors to provide greater granularity and understanding.
The Wolfe Tech Universe rose by 3.0% this week, outpacing the S&P 500’s 2.2% increase. Top stocks were Slack on its IPO (+43%), Sunny Optical (+17%), Jabil (+15%), IPG Photonics (+11%), and WDC (+10%). Laggards were Match (-7%), Wipro (-5%), AMD (-4%), IAC (-4%), and CyberArk (-3%). Our new subsectors highlight year-to-date variations within sectors: in Semis, Semi Cap Equipment has been outperforming; in Software, Security has been underperforming; Internet Services has lagged eCommerce and Media/Entertainment; and IT Services have been blown away by Payments and Transaction Processing (p2).
The Wolfe QES Margin Reversion Model (MRM) identifies companies with historically high profitability currently exhibiting depressed margins. The model then predicts which companies have the strongest likelihood of reverting back to the mean. Most companies with contracting margins aren’t typically flagged by traditional value screens, therefore our quants view the margin reversion strategy as a form of hidden value. MRM is a long-only model updated monthly with a range of 0 to 1.
In our latest Wolfebytes (link), we featured strategist Chris Senyek’s Greatest Hits lists, which are derived from how frequently a company appears on his 31 Long or 12 Short Idea screens. His latest tally finds many of our hardware names attractive, including HP Inc, Juniper, NetApp, Apple, IBM, and Jabil, and a couple unattractive.
Actually, a number of semi makers already had estimated the hit from lower sales to Huawei. Although the WSJ highlighted Huawei as the primary problem, we would emphasize lower revenue with its other OEM customers. Broadcom had been the flag carrier for an anticipated second-half recovery for the chip industry. That optimism largely has been dashed. CEO Tan did blame the trade conflict for causing its customers to reduce inventory. He pointed out that the revenue miss “obviously extends beyond just one particular customer.”
The Wolfe Tech Universe’s 0.6% increase edged out the market’s 0.5% uptick with Software the notable outperformer (+1.8%) and Semis the only decliner (-1.4%) as Avago dashed hopes for a second half recovery. Top performers this week included the IPO of CrowdStrike (+89%), the takeout of Tableau (+30%), Catcher Technology (+14%), and Blackberry (+9%). Laggards were Nutanix (-9%), Elastic (-9%), Salesforce (-7%), AMD (-6%), and Dell (-6%). Bifurcation remains (Exhibit 1).
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