October 2016. The asset manager DNB believes technology stocks are attractively valued. The technology team took advantage of low prices to stock up on Ericsson and sold Pokémon-owner Nintendo after the stock doubled. The two technology funds are showing great momentum and their assets under management broke through the 500 million euro mark.
“All in all, technology stocks are not expensive,” stresses DNB portfolio manager Mikko Ripatti, who advises international investors and is based in DNB´s Luxembourg office. Tech stocks net of cash are trading at an average P/E ratio of 16-17x. The fundamentals of the technology sector have changed considerably since the dotcom bubble. Ripatti says: “Today, the established players in the technology sector are companies with strong balance sheets and cash flows, reasonable valuations and sustainable business models.”
Betting on Ericsson
For Anders Tandberg-Johansen, who heads the Global Technology Team at DNB, valuation is one of the key criteria when selecting stocks. Based in Oslo, they are not interested in pipe dreams; instead they look for stocks with high upside potential and limited downside. This includes stocks where the market has almost priced in a “worst case scenario” and a good chance for a better outcome is seen. In July and August the Norwegian team stocked up on the Swedish network equipment provider Ericsson. Its share of the fund volume increased from one to four percent. Tandberg-Johansen, who as lead fund manager is ultimately responsible for the 2.5 billion euros DNB technology portfolio, which comprises several mandates, thinks there is little risk of further setbacks for the share, after the punishment it has taken. A new CEO should put fresh wind in the sails of the company and its shares.
The fitness tracker manufacturer Fitbit was added to the portfolio for the first time. The US-company took a beating on the stock market and is attractively valued in DNB's view. DNB also stocked up on Western Digital, a manufacturer of hard drives and flash memory products. The group is likely to benefit from a recovery in prices of these data storage solutions.
20 percent growth
According to fund manager Tandberg-Johansen, the signs are all positive for Google and Facebook: “Organic growth in Google is more than 20% and close to 60% in Facebook.” After very good Q2 results, the fund management team added a small stake in Facebook. The growth rate will have to come down in Facebook, but the team thinks that monetisation of Messenger and Whatsapp will surprise the market on the upside.
Having already siphoned a large share of advertising revenue away from print media, Facebook and Google now have traditional TV business in their sights. Traditional TV companies also find themselves under pressure from modern content providers such as Amazon Prime, Netflix and YouTube, the latter part of the Google empire. Given these developments in the media sector, Tandberg-Johansen anticipates a revaluation: “Media stock forecasts will continue to decline.”
Telecoms too expensive
The fund manager is similarly pessimistic over the telecom sector. Telecoms such as AT&T and Verizon are in demand from investors because of their seemingly stable business models. However, Tandberg-Johansen believes the earnings estimates will come down due to tough price competition. AT&T’s acquisition of the satellite TV distributor Direct-TV makes the valuation multiples look reasonable short term, but it will come back and haunt them longer term. “Bundling and distributing TV channels will be a “no-margin” business in the future.”
DNB has disposed of Nintendo, but only after the stock doubled in price. The fund manager took a position in the company ahead of the launch of Pokémon Go. Up to two percent of the portfolio was invested in the games manufacturer.
Funds reach milestone
The investment strategy, which is based on bottom-up analysis, is producing the desired results (see box below). The performance has attracted investor interest, further increasing the volume of managed client funds. More than 500 million euros have now been invested in the long-only product DNB Technology (ISIN: LU0302296495) and the market-neutral DNB TMT Absolute Return (ISIN: LU0547714526), which bets on both rising and falling prices. Tandberg-Johansen and his tech team manage assets totalling 2.5 billion euros.
