Tech Investment Outlook After a Turbulent Start to 2022

By Bill Studebaker, CIO & President, ROBO Global

 

January has delivered a shock to stocks. Though we think it is clear that the markets are correcting—not crashing—now is the time for wise investors to remain calm and, above all, disciplined.

At ROBO Global, we understand that markets never go straight up, which is why we have maintained a highly disciplined approach to our investments from the start. This includes selecting quality companies that exhibit dominant market share and technological leadership, as well as maintaining global diversification with no concentrated bets. In each of our three portfolios—ROBO, HTEC, and THNQ—the top 10 positions represent less than a 20% weight, and we rebalance quarterly to smooth out volatility and maintain that necessary diversification. During the pandemic ‘tech melt-up’, this approach was questioned by certain investors who wondered why we were not more concentrated given our domain expertise. Our steadfast answer has always been that slow and steady wins the race!  

The current drop in share price may be unsettling for investors. That is to be expected. The sudden tech rout has sent stock valuations tumbling to their lowest level since the first few months of the pandemic. Adding salt to the wound, this shift arrived just as the earnings season for this group began. But taking a deep breath and stepping back, it appears that much of the froth has already subsided for many market segments. Headline multiples have contracted to more reasonable levels, and expectations have been meaningfully (and appropriately) curtailed.

But there is still plenty for investors to contend with. Valuations have sunk to levels not seen since the early days of the pandemic. The tech-heavy Nasdaq 100 Index is at its most oversold level since 2018, with more than 1/3 of the Nasdaq 100 stocks down more than 30% from their 52-week highs. Chip stocks are off to their worst start in nearly three decades, and the Fear and Greed indicator, a technical gauge that measures buying strength versus selling strength, ranks market volatility and market momentum in “extreme fear” territory. As dramatic as it may seem, I must reiterate that what we’re seeing shows all signs of being a typical correction. For investors, the bigger question isn’t ‘how far stocks will drop before they stop,’ but ‘how can I optimize the environment for future growth.’

At ROBO Global, our portfolios are not impervious to the global downturn. The market price of ROBO, THNQ, and HTEC are down -16.66%, -25.81%, and -31.51% from their 52-week highs, respectively. This level of relative performance comes as no surprise, with all three portfolios reflecting the multiple compression at the high end of the valuation spectrum. HTEC and THNQ each have 19 stocks with Enterprise value-to-sales (EV/sales)5 > 10x. ROBO has 14 such stocks, but it also has 10 stocks with EV/Sales <1x, making it a much more balanced portfolio from a valuation standpoint6.

Downturns are never pretty, but we continue to believe that robotics, automation, AI, and healthcare technologies represent some of the most significant investment opportunities of our generation. The pandemic proved that point, creating an urgent call to automate that accelerated the adoption of existing technologies and increased demand for more research and development. According to a report in the National Law Review published in late January 2022, even as fear has taken hold of the general markets, investors are continuing to fund robotics innovations in the medical, manufacturing, logistics, hospitality, and automotive sectors. “With plenty of cash in the market, venture capital (VC), private equity (PE), and strategic investors aim to capitalize on and steer development of disruptive robotics technologies.” The ROBO Global portfolios are designed to enable strategic investors to take part in this wave of opportunity.

The trajectory is clear, and even the sharpest market correction won’t alter the course. We believe valuations remain attractive—especially considering the expected growth in earnings. At the close on Tuesday 1/25/22, ROBO was trading on 27x forward PE, just 10% above its long-term 24.6x historical average; HTEC was trading on 5.4x EV/sales, 10% below its historical average of 6x and 25% below its Feb 2021 high of 7.3x.; and THNQ was trading on 7.3x EV/sales, in line with its historical average (3.5 years) and 30% below the Feb 2021 high of 10.5x7. With that level of correction hopefully in the rear-view mirror, we see investing in this landscape as especially attractive. There’s no denying that robotics, automation, AI, and healthcare technologies are transforming industry, retail, and the lives of consumers. The more ubiquitous these technologies become, the more investors who recognized that potential may potentially benefit. 

 

 

1 Source: ROBO Global ETF Factsheets as of 12/31/2021 (https://www.roboglobaletfs.com/investor-materials)

2 Source: Bloomberg, as of 1/26/2022

3 Source: https://money.cnn.com/data/fear-and-greed/, as of 1/26/2022

4 Source: Bloomberg, as of 1/26/2022

5 Enterprise value-to-sales (EV/sales) is a financial ratio that measures how much it would cost to purchase a company's value in terms of its sales (Source: Investopedia)

6 Source: ROBO Global, S&P CapitalIQ as of 1/25/2022

7 Forward price-to-earnings (forward P/E) is a version of the ratio of price-to-earnings (P/E) that uses forecasted earnings for the P/E calculation. This is not a forecast of the fund’s future performance.

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