Reuter’s Trading at Noon: Is Big Tech Still a Good Bet?

February 4, 2021

Adam Coons, CFA and Portfolio manager at Winthrop, joined Reuter’s “Trading at Noon” to discuss where we are looking for opportunities in the stock market. He also discusses the recent meeting between Janet Yellen and SEC regulators and how increased regulations could affect investors.

Elena: Earlier, I spoke to Adam Coons of Winthrop Capital Management and started by asking him if “Big Tech” is still a good bet.

Adam: Yeah, I think you still have to look at the big tech companies like Google, Microsoft, Apple. The earnings out of those companies were extremely strong. Revenue growth continues to be double digits, cloud-based growth has been 50% for Microsoft Azure, and you’re still seeing nearly 50% growth in Google. Even out of Amazon web services, you’re still seeing decent growth out of their cloud computing.

When you look at companies outside of the U.S. – which is what we’re doing – companies like Alibaba, there is cloud growth in the same range around 40%. Overall earnings growth and revenue growth across the board for these companies are in that 20-25% range. So we still like the “Fang” type stocks, but what we’re really doing is looking outside of those “Big Tech” stocks to see if we can find value.

Where we’re not going is into the so-called “deep valued” companies. You look at companies like IBM, Hewlett-Packard, Xerox – very low PE ratios. But when you look at the earnings potential and revenue growth – it is just not there. I don’t want to call them dying businesses, but they’re not businesses that are showing any kind of growth through this COVID pandemic.

Instead, we’re looking outside of the United States. Tencent and Alibaba are a couple of our favorites that are showing substantial revenue growth, earnings growth power, and a very diverse portfolio of offerings in the tech space.

Elena: Now towards the end of last year, there was a lot of talk about rotation, about moving away from Tech stocks, stay-at homes that did well in the pandemic, and into value stocks that of course didn’t do too well in 2020. Where is the rotation?

Adam: I mean there definitely is a rotation into smaller-cap stocks. As a great example, equal-weight ETFs and funds over the last three months have outperformed market cap weighted ETFS. So there is a rotation as some of these “Big Tech” stocks have frothy valuations, but I think when you look forward, these large-cap companies still have growth potential. Looking at the Small cap, a lot of this has kind of run its course, so we’re moving back into the camp of looking at the companies where the secular change from the pandemic will continue. We think that the smaller cap companies have really run their course already.

Elena: Treasury Secretary, Janet Yellen, is of course meeting the head of the SEC and other regulators today on the back of the chaos we saw in the market last week by an army of retail investors organizing on social media. If they discuss new regulation, would that be a good or a bad thing?

Adam: I’m never a fan of increased regulation. I think what investors will have to need about is what this will mean. The big thing that is going to be discussed is trade flow, and can these brokers sell trade flow. What a lot of people don’t realize is that’s how we’ve moved to zero-dollar trades. Charles Schwab, Fidelity, and TD Ameritrade can’t do zero-commission trades without some sort of income, and what they’ve done is that they’ve begun to sell your trade flow. So that’s the big question that would come under regulation, and I think at the end of the day, retail investors would not really benefit from that. This is a really one-off story, so to change all of the rules because of a one-off story just doesn’t make any sense.