13th August 2015
Geir Lode manager of the Hermes Global Equity fund, navigates the increasingly divergent tech sector to highlight five diverse stocks he believes can deliver strong, sustainable returns to investors…
There has been a real divergence in the tech sector between the consumer-facing innovators and the hard component stocks. While tech stars such as Amazon and Facebook steal the headlines, we are finding value in unloved semi-conductors and hard component companies.
Innovative tech firms are shaping the world, but what we look at is the shape of future shareholder returns. It is our job to consider whether company management carries a hubris premium. We must ask whether company management is empire-building or constructing a platform for sustainable returns to shareholders.
We like stocks with robust financial statements, competitive strength and a proven ability to consistently beat revenue and earnings expectations. We assess each stock’s value, growth and quality characteristics, along with market sentiment towards the company, to find those with the optimum combinations.
Google is one of the stellar names in our portfolio. The tech giant is seeking to branch out into new growth projects from driverless cars to wearable technology, but they are conducting this activity at a relatively modest scale. For example, Google Ventures provides capital funding to bold new companies independent of Google. Since we have owned the company, it has delivered strong earnings. It is trading at an attractive valuation and, crucially, the company is still growing.
The Apple share price has been undergoing some recent volatility, but we remain supporters of the stock. People tend to get hung up on things like new products and how many are they selling, and when will they disclose the numbers, but we think you need to take a broader, longer-term view. There is work to be done in product transitioning in the US and Europe, but if you look at the quality of their product lines versus the competition and the company’s enormous cash pile, we believe Apple remains in a very strong market position.
Lam is a leading supplier of wafer fabrication equipment and services to the global semiconductor industry. It develops innovative solutions that help its customers build smaller, faster, more powerful electronic devices. We think Lam has a very strong product line. The company is growing its market share and we are impressed about how the management is building the business. We have high confidence in the model.
ASML is a Dutch company that is currently the largest supplier in the world of photolithography systems for the semiconductor industry. The company is impressively growing the breadth of its technology. Success depends, to an extent, on how they will be able to penetrate the market with new products, but we believe this company should also be able to grow a strong franchise.
This US-based company manufactures memory chips. This is deep cyclical name that is down 75-80% since its peak. Ten years ago there were tens of players in this space. Now with just two key players withstanding, the duopoly situation should give more cover going forward. The company is still making money, and it has cash on its balance sheet, so we can wait for a rebound. We expect a high return on capital going forward, given the size of the industry.