I read a great report this week from Barclays's equity strategist Venu Krishna who drills down on Big US Tech and some interesting metrics. First, Big Tech (defined as Amazon, Apple, Alphabet, Meta Platforms, Microsoft and Nvidia Corp) is fantastically profitable. Its profit margin of 23.4% is more than double that of the rest of the S&P 500. These companies are in a genuinely strong competitive position and using it to make big profits. If we define margins via earnings before interest, tax, depreciation and amortization, then we find the tech sector’s margins almost doubled over the last 25 years and remained flat for everyone else. As for valuation, Krishna’s analysis confirms that the Big Six don’t look overvalued by conventional metrics. The issue instead is whether they can maintain growth on their current trajectory. Using the PEG ratio (the price/earnings to growth ratio, which compares the current valuation multiples to growth in earnings over previous years), we find that Big Tech is actually cheaper than the S&P 500. It’s also very much cheaper than European and other non-US stocks, thanks to their far inferior growth rate. Again, the key question: Can the Big Six keep doing this? Aside from watching the obvious - price action - it probably remains most important to track exactly how well these companies do at growing revenues and profits. They’ve set quite a pace for themselves. Slowing would harm their share prices. But the report also suggests that the risks of holding them aren’t as serious as they might appear. There has been a pullback lately but we will continue to be nicely weighted in Big Tech until actual harm arrives.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(~) Alphabet (GOOGL-US) I found this interesting. Google is best known as a tech company, but it’s got a formidable food business nonetheless, as it seeks to feed its armies of workers in a crucial tech perk that helps it maintain talent. The company prepares over 240,000 meals per day across 386 cafes, as well as 1,500 micro kitchens and 49 food trucks in a fairly expansive operation. For perspective, there are only 360 Cheesecake Factory restaurant locations in North America, so the company is really operating at an impressive logistical scale. Owned in Core, ESG+ and US Portfolios.

(+) Intuitive Surgical (ISRG-US) has received FDA clearance for its next-generation multiport surgical robotics system, da Vinci 5. The da Vinci 5 will be initially made available to a small number of U.S. customers who collaborated with the company on its development and those with “mature” robotic surgical programs. Owned in Opportunity Portfolio.

(+) Madrigal Pharma (MDGL-US) The FDA approved resmetirom as the first U.S.-approved therapy for a liver condition called nonalcoholic steatohepatitis (NASH). NASH is a crowded area in biotech, where weight loss drugmakers Eli Lilly and Novo Nordisk are also seeking entry. This new pill, called REZDIFFRA, is a big deal in medical history because, until now, there were no FDA-approved treatments for NASH, which is a serious liver condition. The FDA's approval allows resmetirom to be used in combination with diet and exercise for adults with NASH and moderate-to-advanced liver fibrosis. Owned in Opportunity Portfolio.

(new) Pinduoduo (PDD-US) We purchased shares because of its ownership of Temu- an online marketplace. Temu launched in the US in September 2022. The company offers heavily discounted consumer goods and ships many products directly from China. Last year, Temu was the 8th most downloaded app globally and number one in the US. Temu’s owner Pinduoduo has a market capitalization about the same as Pfizer. PDD is the third largest holding in MSCI China and the eighth largest holding in MSCI Emerging Markets. New position in Opportunity Portfolio.

Weekend Reading

 

The Dumber Side of Smart People How could someone possibly be too intelligent? How do you get to a point where you realize you could have been more successful if you had been a little dumber? COLLAB FUND

20 Lessons From 20 Years of Managing Money From Ben Carlson and his blog A Wealth of Common Sense A WEALTH OF COMMON SENSE

U.S. outperformance continues but no sunshine yet for the Canadian economy We continue to expect the U.S. Federal Reserve to make its first cut to rates in its June meeting, and the Bank of Canada and European Central Bank in the week prior to the Fed (also in June), and a much more hawkish sounding Bank of England to follow suit later in August. FINANCIAL MARKETS MONTHLY - RBC

Electravision J.P. Morgan’s Michael Cembalest published the 14th edition of his popular annual energy letter. In this year’s essay, Electravision, Cembalest performed a deep dive into the potential to electrify everything. Achieving this vision of the climate change movement requires a literal rewiring of how society generates and transmits energy, a challenge Cembalest is careful to quantify using facts and data. One glaring constraint is the seeming inability of the US to materially grow electricity generation, a metric that has been essentially flat for decades. THE NEWTON GROUP