StableView Asset Management President on 2019 Technology Investments

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

StableView Asset Management Inc President and Portfolio Manager Colin Fisher joins James to discuss his 2019 technology market outlook and the investment potential of artificial intelligence. Like the broader market, technology stocks were hit hard at the end of 2018 but are starting to rebound. Technology stocks are also experiencing a hangover effect from industry leaders like Apple announcing macro environment problems as well as a sensitivity to other macro issues. However, the vast majority of Canadian tech companies are B2B, which typically experience less volatility and recover quicker. Given current volatility, StableView looks for companies that provide an essential service and as a result, recurring revenue. Fisher notes the current hype surrounding AI is reminiscent of the early days of the dot-com boom and the recent crypto enthusiasm but predicts it will be harder to invest in because the big winners in the AI space will germinated in the private market.

Transcript:

James West:   I’ve got a special guest here with me now. Colin Fisher’s the CEO of StableView Asset Management. Colin, welcome back.

Colin Fisher: Thanks for having me back.

James West: Now Colin, StableView Asset Management is principally interested in the Canadian technology landscape and so that’s a refreshing break from our focus on cannabis. So tell me, how is the technological landscape from an investor’s perspective going into Q1 2019 in Canada?

Colin Fisher: Well, I think it, like anything else, got a bit of a spanking in the last quarter last year. A lot of what I’m seeing is starting to recover quite significantly. I think, you know, you get the cascading effect of stock price goes down, you run into tax loss selling, and then that really starts to punish it into the tail end, and you have the pylon on the fact that a lot of liquidity typically dries up in the tail end of last year – or of any year where you’re getting into tax loss selling area.

So a couple of stocks that I’ve been looking at are starting to rebound nicely. You know, a lot of the time you get in technology, I mean, if the companies are performing well – I mean, you can splice in out in a whole bunch of different ways, but at the end of the day, if you have real companies doing real things and making real money, and the market writ large writes off, unless they’re in nosebleed valuations, they will typically recover relatively quickly.

James West:   Is that what happened in Q1 so far? Like I mean, with cannabis stocks…

Colin Fisher: Well, we’re only 8 or 9 days in.

James West:   The cannabis space, everything that had sold off by 50 percent is now, a lot of it’s back up 10, 15, 20, 30 percent.

Colin Fisher: Yeah, I don’t – so a number of the positions that I’ve been in, yeah, a couple of them are up in the 20s, 15, 20s.

James West:   Oh, okay.

Colin Fisher: But you know, it’s all relative, right? I mean, it depends on where you’re at. You’re getting, you know, some of the hangover effect of, you know, some of the Apples of the world starting to show, you know, that they’re having growth problems in China; they’re starting to show that some big macro events are going against them.

James West:   I saw LG reported 80 percent drop in revenue. That’s pretty huge.

Colin Fisher: Yeah, and so a lot of these consumer elements, right? So you know, the big tech has parallels to credit, so if the consumer is starting to get tapped out, some of these more consumer electronics, you know, they don’t have recurring revenues built in. so like an LG is typically more of a B2C type product or type company, lot more consumer-facing, same thing with Apple: a lot more consumer facing. So the more consumer facing or the more sensitive to the overall macro environment, including things like credit, are consumers tapped out – if you’re getting into that type of thing, then the bigger companies are typically more sensitive to that. So you’re going to have the Apples, the LGs, whereas if you have companies that are typically prevalent in the Canadian landscape, which are B2B companies. Like 99 percent of all our tech is B2B. We’re not a big consumer, we’re just big, we’re like 35 million Canadians across the country.

So as a consumer marketplace, we’re microscopic. So the vast majority of the technology that is addressed in caranda is servicing businesses, and so the B2B typically has less volatility in their revenues, particularly if they are contractually based or their recurring nature in their contracts. so that is a lot of what I invest in, is primarily. It doesn’t mean you don’t get a spanking if the market’s getting spanked with everything else, it’s just that typically the recovery is a little big quicker as there is a little bit more meat on the bones for any sort of product.

James West:   Sure. So if technology is leading the selloff in the broader market, which is the case, arguably –

Colin Fisher: At the larger cap, yeah.

James West:   And that has the effect of taking all segments lower, how do you position yourself for a year like 2019 where there’s this huge risk of recession, given all the macropolitical, you’ve already got technology leading the broader market to the downside, you know, the interest rate question is still not exactly a given. So what do you become more attracted to, what do you become less attracted to in such an environment?

Colin Fisher: Well, thematically – I mean, I don’t know if I’m thematic, necessarily, per se, but if I was to say what is it that I’m looking for commonality in the type of companies that I’m investing in, typically what I’m looking for are the types of businesses wherein you have a service that is not going to be cut off – like, you are tied to that, you need that. I mean, I used as an example, and I found an exception to the rule, but let’s say you were renting a pacemaker. Let’s say pacemakers were heart as a service.

James West:   Lifespan as a service.

Colin Fisher: Lifespan as a service, and you had to pay a monthly rental on that. My suspicion is that everyone with a pacemaker is paying their pacemaker bill; they need that pacemaker if you want to kick around.

James West:   So they can cut it off if you don’t pay?

Colin Fisher: Well, if you want to go into some dystopian universe, yes, but the idea is that if you need a pacemaker to stay alive, then you actually want to stay alive, then you would pay that bill because it’s so critical to you.

James West:   Right.

Colin Fisher: The funny thing is, I use that as an example, and then literally the next day I had a conversation with a friend of mine and her great-aunt decided not to go and get the battery changed in her pacemaker and she passed away a few weeks later.

James West:   You’re kidding!

Colin Fisher: She was like, I’m done. Because they keep kicking you back. I mean, if you’re about to start fading, then the pacemaker kicks in and you’re back to life, even if you don’t want to be. So they were saying Oh, you’ve got to replace your battery, she’s like, No I don’t.

James West:   So replacing your batteries is not just like opening a slot and sticking in – you’re under the gun and under the knife.

Colin Fisher: No, 100 percent.

James West:   I’m sorry to hear that.

Colin Fisher: Well no, but it’s a proof-positive that even really good business models like a pacemaker rental service on a monthly basis isn’t going to have a 100 percent recurring revenue for your client bases.

James West:   That’s true. That’s true, I guess. Okay, so I’m seeing a lot of fooferah around artificial intelligence, and I’m curious as to what’s your sort of exposure or take on the sector as it’s emerging.

Colin Fisher: So AI is, I think, one of the – so you get these stories that engage the animal spirits of the investor. This is so exciting, what are the capabilities? It was like the internet in, whatever, in the early 90s, early 2000s, you know, everyone was, you know, what could it do? If you go back to the 2000s, you know, you have to remember that there were companies that it was a travel agency with a website and the idea was oh, you could access the world – anyone could order off it. Well of course you could, but the technology, the infrastructure, all of the things that surrounded the ability to make a sale wasn’t there. So that company had $300,000 in revenues and was worth $1 billion.

So what it does, like we had the Blockchain – Blockchain was, you know, all of these capabilities. And then, you know, the crypto surrounding the Blockchain and all of these elements. The excitement levels there, AI, in my opinion, is one of the more realistic and current, like contemporary, solvers of problems. It’s a real business right now that can solve real business problems.

I think with Scotiabank, they bought a chatbot, and they bought the chatbot for the purposes of collecting – so they could put that chatbot and if you owed them money and you were delinquent, now you have –

James West:   A pop up box to annoy you.

Colin Fisher: No, I was thinking more like a Terminator, right? It doesn’t sleep, it will never tire, it’s coming after you at all times: it is coming to collect your dough. And when you look at – so whenever you look at an application of technology, you’re trying to figure out where is the fat part of the problem that has the highest cost and the greatest amount of benefit if you solve that problems.

So a lot of fintech companies, many times, you know, I think I mentioned this the last time is if, you know, if I’m making your shirt and the material of your shirt is $200 and the buttons are $0.05, and I’m solving a problem on your button, like oh, I can make them half the price, it doesn’t materially change anything.

In the instance of, when u look at the problem of, for example, lending, and you know, you have a lot of lending tech companies, and when you get into that, you’re going okay, well, the big problem is in the collections. The big problem is employing people to collect and do the administration around that.

And so what I think is, you look at AI – AI, for that application, is massively important. Massively important. So I think AI is going to be one of the category killers. The problem is, how do you invest in it? Right? And this is part of the issue, is that you get all this excitement: so you hear all this big money going into these areas, and I liken it to, I’m going to use a slightly less evil-sounding example, but you know, if you have, I’m trying to think of one – okay, I’ll just use the one – the concept of disruption and chaos. If you take a whole bunch of pit bulls and you put them into a pit and you say which one is coming out, it’s a random – you have no idea, they’re all big. But if you have a pit bull in a big pit full of chihuahuas, there’s a high probability. So the first environment is chaotic, the second one is disruptive.

So in the AI world –

James West:   To the chihuahuas.

Colin Fisher: Yeah, for the chihuahuas, because if you assume that the entire industry is –

James West:   Who the hell is that guy? Oh no!

Colin Fisher: That’s gonna – and from a technology point of view, that can happen from time to time.

James West:   Right.

Colin Fisher: So AI took a long time, but the computing power and the GPUs and all that ability for the processing power now is real and live, and they can do amazing things. So I think AI is massively useful, the issue is going to be, I think there’s going to be more hype around the application and a lot of the winners are going to be, we’ll never see them. It’ll be companies that have, like Scotiabank for example, it’s going to drive down their costs. Same thing with Blockchain. The big thing about Blockchain is driving down costs initially.

So to find a company in that space is going to be difficult, because most of them are germinated in the private market, and for you to get your mitts on them, or somebody else is going to buy them out well before they become public.

So I would imagine the vast majority of your viewers are playing in the public markets; there’s going to be AI-type things coming out, but a lot of them aren’t going to be, in my estimation, really investible. A lot of them are going to be more hype than they’re going to be – far more sizzle than there is steak.

James West:   Okay, well that’s interesting, Colin. We’re going to leave it there for now and come back to you again next week.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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