With the 2020 election around the corner, US government debt rising, and the budget deficit expanding, the potential for a corporate tax hike is top of mind. Strategist Chris Senyek dug into the possible Corporate Tax Unwind, examining the implications of likely tax reform changes that could come with a new administration. His team also provided their Tax Reform Excel spreadsheet, which can be used to estimate EPS impacts from tax reform on each US company.
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In this walk-through of our TechStrat Monthly report, we highlight surprising stats regarding tech’s post-Corona performance, discuss the latest ISM New Order figures, review our sector thinking, and identify stocks we favor and would avoid.
Tech outperformance broadened to mid- and small caps in April/May, causing our equal-weighted Wolfe Tech Universe to beat the market by 11% quarter-to-date. In fact, 38% of tech stocks are above their prices at the market peak Feb 19 and 59% have outperformed the market since then. It’s difficult to identify a catalyst that will knock tech and work from home stocks off their perch in the short term, but extreme valuations and overbought technicals keep us neutral overall.
Platforms are nine of the top ten tech market caps, and their dominance has attracted government attention. Academics Geoffrey Parker, Georgios Petropoulos, and Marshall Van Alstyne address applying antitrust to platform companies. Increasing returns means that being early pays off in potential market domination. Consequently, there is significant competition for the market but less competition within the market. Once ensconced, platforms can leverage economies of scale and data-driven scope to adjacent opportunities. We plan to interview Professor Van Alstyne soon.
451 Research recently published its Voice of the Enterprise: Data & Analytics, Data Platforms report, a survey of about 500 IT executives conducted over February and March. The study was taken during the initial stages of the Covid-19 outbreak, but the trends likely won’t much change. Organizations increasingly are leaning on data to make strategic decisions with 66% indicating that nearly all or most decision making is data driven (Exhibit 1). Among those that employ data for nearly all strategic assessments, 90% rate their organization’s IT data and analytics initiatives as successful (Exhibit 2). Conversely, only 26% of lagging “data drifters” rate their initiatives positively. We expect laggards will be forced to update their decision making.
Our tech index rose 4.3% the past week, outpacing the S&P 500’s 3.2% gain and putting the Wolfe Universe up 1% for 2020. Services (+6%) rebounded this week but still lags over 3 and 12 months (Exhibit 1). Software (+5%) resilience continues to surprise while Internet (+4%) took a breather from its recent run. Top stocks this week were former laggards Sabre (+31%), Amadeus IT (+24%), Nutanix (+21%), Cree (+21%), and TripAdvisor (+21%). Laggards were Weibo (-15%), Sunny Optical (-14%), Catcher Tech (-12%), Semi Manufacturing (-12%), and Etsy (-10%).
Please view our latest video, in which we reflect on VAR checks and discuss the recent broadening of tech stock performance, how tech has become overbought, and highlight names of interest.
We have written about Hamilton Helmer’s framework as articulated in his book 7 Powers: The Foundations of Business Strategy. Helmer began as a consultant at Bain & Company, later opening Helmer & Associates and working with clients such as Adobe, Agilent, Coursera, Mentor Graphics, HP, and Netflix. Helmer defines company strategy as a route to continuing power in significant markets, which considers ROIC and size of opportunity. The 7 Powers—ways to create durable, differentiated returns—are (1) scale economics, (2) network economics, (3) counter-positioning, (4) switching costs, (5) branding, (6) cornered resource, and (7) process power. Based on hundreds of engagements, he believes these capture all winning strategies.
The popular documentary The Last Dance followed the Chicago Bulls through six championship season in the 1990s. As long as we’re reminiscing about the ‘90s, Twitter recently unearthed an article that described perhaps the most important concept to come out of the 1990s—increasing returns. W. Brian Arthur was a professor at Stanford and the Santa Fe Institute in 1996 when he penned Increasing Returns and the New World of Business in the Harvard Business Review. He had written previously on it, but this article put increasing returns in the mainstream. In fact, we hosted him for an investor webcast at Morgan Stanley back then. However, we didn’t fully appreciate the impact increasing returns would have on tech investing the next 25 years.
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