The ‘great’ rotation out of the Magnificent Seven (M7) and other AI-benefitting US tech companies accelerated earlier last week and the weight of the sell-off outweighed any buying of stocks that will do well in the future. However, by week’s end, all was ‘forgiven’ or ‘forgotten’, with the Nasdaq up 6.57% for the week!
As I wrote my Saturday piece for The Switzer Report, I couldn’t help thinking about that Robert De Niro film entitled What Just Happened!
Let’s have a look at the Nasdaq over the past month to see what actually has happened.
Nasdaq Composite
The chart above shows this tech-heavy and M7 dominated index has dropped a big 8.41% over the past month, while the Dow has only lost 0.64%. If it wasn’t for the recession fears malarky last week, it would be in positive territory.
Why? Well, this (the Dow Jones) stock index has less tech companies and more companies that will do well with falling interest rates in an economy that has softly landed. A recession wouldn’t be good for many companies but a slowing economy, set to be helped by possibly three rate cuts by year’s end (and more cuts next year) would lift the Dow index.
But if big tech is going to be on the outer as rates fall and fund managers take profits to buy other companies that will like rate cuts, should we be dumping our best tech stocks?
Let’s look at Xero (XRO) & Next DC (NXT)
Xero (XRO) and Next DC (NXT) were two local tech companies that tended to pick up the tailwind of the M7 surge over the past year. This is how Morningstar’s Bella Albrecht described their run: “From the start of 2023 until the most recent peak in the US Market Index on July 16, the market returned 50.2% cumulatively. Leading the rally was Nvidia, which surged 765.2% and contributed 7.5 percentage points to the gain on the market. Microsoft and Apple each gained over 80% and contributed over 4 percentage points to the market return. The next three largest were Amazon, Alphabet, and Meta, each contributing over 2 percentage points.”
Over that time XRO was up a whopping 87%, while NXT rose a nice 75%. You have to ask this question: do these lose out in the eventual local rotation into stocks that will enjoy rate cuts and an improving global economy?
What do the analysts think of Xero & NextDC?
This is what the analysts surveyed by FNArena think: XRO up 21%, while NXT is tipped to jump 28%, so there must be thoughts that lower interest rates, artificial intelligence and other pluses are likely to help these companies. I hope they’re right, but I should add that while I expect the M7 stocks to lose some ground (as they already have), there’ll be a time when market players will see value in the lower stock prices. In summary, I don’t think they’ll be trashed but simply re-rated.
Stocks such as XRO and NXT are new age blue chip stocks and would be part of most constructed portfolios by advisers or self-directed investors. They also feature heavily in exchange traded funds, being in the top 100 ASX-listed companies by market weight, which keeps them in the buy zone.
What about less ‘blue chip’ companies such as Audinate (AD8) and Megaport (MP1)?
Let’s review their showing since the start of 2023. AD8 was up 164% until March 15 this year but since has dropped 62%! Let’s check out the views of experts, who on average see a 44% rise ahead.
Macquarie says: “Audinate Group’s core business remains solid, with strategic plans to address known issues. The transition to software products is expected to improve gross margins. And while Macquarie did reveal that “the target price is revised to $10.50 from $14.40”, they upgraded the stock to outperform from neutral. UBS was also very realistic about the company’s recent reports, but I liked this: “The broker still believes in the long-term structural shift to digital from analogue, Audinate’s strong leadership position and a deep moat which is superior to anything under UBS’s Emerging Companies coverage. The large upside opportunity from video is also noted.”
Deep moats are the sorts of competitive advantage characteristics that great investors such as Warren Buffet advises us to look out for.
Now what about the not-so-blue chip but up and coming Megaport (MP1)? The consensus view says a potential rise of 42.7% is on the cards. Six out of six company watchers like the business, with Citi and UBS looking like big fans.
This is what the Citi expert thinks is up for MP1: “The analyst points to an acceleration in cloud growth and cloud migrations; strong demand for artificial intelligence services with Microsoft noting capacity constraints on the inference segment and growth in the Ai infrastructure spend. Citi believe there is a “multi-year” spend on cloud infrastructure and Microsoft taking a larger share of the public cloud is a driver of multi-cloud adoption and underpins structural growth for Megaport”.
One final tech stock to watch has to be Wisetech (WTC), which has been a stellar performer in recent years. This chart shows nine years of stock market greatness.
Wisetech (WTC)
The consensus view is a rise of 7%. Here are the more extensive views on the company.
This shows that WTC is a blue chip tech stock, and I expect it to keep rising, like M7 stocks. It should be in many future portfolios. Its share price has dropped around 6% in the past month of rotation but, undoubtedly, over time, it will advance like most quality blue chip companies.
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